northwest fcs 2015 annual report

PO Box 2515Spokane, Washington 99220-2515

New address?Please notify your local Northwest FCS branch.

2015 ANNUAL REPOR T100 Years and Still Growing

Visit us at: northwestfcs.comThe 2015 Annual Report is also posted online.For additional printed copies please contact Northwest FCS at 1.800.743.2125

This institution is an equal opportunity provider and employer.

Here to Help You Grow™

($ in millions)Cash Patronage Paid

$64.12014

$58.12013

$55.22012

$53.32011

$91.92015

Chair MessageThe success of American agriculture over the past 100 years is unsurpassed. Farm families and agricultural businesses have made incredible advances to feed a growing world population and serve a changing marketplace. In the early 1900s one farmer grew enough food to feed 10 people, most likely their family and friends. In the 1960s this number grew to 46 people with a national reach. Today, one U.S. farmer produces enough food to feed 167 people across the globe and the Farm Credit System has been there every step of the way.

The Farm Credit System is an amazing public policy success story. It’s hard to believe any piece of legislation could endure 100 years. When President Woodrow Wilson and Congress passed the Federal Farm Loan Act in 1916 they had the wise foresight to create a governing structure made up of farmers and ranchers. They established Farm Credit to be a private sector entity with a special mission to serve agriculture and rural communities. Cooperative ownership was a new concept back then. Many people didn’t think it would last. However the Farm Credit System proved itself with loyal members who have a voice in how we do business and a stake in our long-term success.

I’m honored to serve as chair of the Northwest FCS board. With a strong financial foundation we’ve been able to stand by produc-ers when times are troubled and help them grow when the opportunity is right. We’re confident in the financial capacity of

this organization to share our success with members through a robust patronage program and give back generously to the rural communities we serve. This year the board increased patronage from 0.75 percent to 1.0 percent of our customers’ eligible average daily loan balances. Since 2011, Northwest FCS has returned more than $322 million in cash patronage dividends to our customer-members who, in turn, reinvested these dollars back into their farms and local communities.

2015 was another outstanding year for the association. We’re privileged to serve great customers who are the foundation of our success. On behalf of the board, I would like to thank all our customer-members, management team, employees and Local Advisory Committee members for their contributions to these exceptional results.

We look forward to seeing many of you at our local events in 2016. As we honor our rich history during this centennial celebration we look ahead to the opportunity Farm Credit brings for future generations to steward the land and feed a growing world.

21 100 Years and Still Growing

Dave Hedlin,Board Chair

2015 Board of Directors

Front Row: Susan Doverspike Burns, Oregon • Chair Dave Hedlin Mt. Vernon, Washington • Vice Chair Jim Farmer Nyssa, Oregon • Karen Schott Broadview, Montana

Middle Row: Greg Hirai Wendell, Idaho • Christy Burmeister-Smith Newman Lake, Washington • Herb Karst Sunburst, Montana • Dave Nisbet Bay Center, Washington • Kevin Riel Yakima, Washington

Back Row: John Helle Dillon, Montana • Duane (Skip) Gray Albany, Oregon • Shawn Walters Newdale, Idaho • Nate Riggers Nezperce, Idaho • Julie Shiflett Spokane, Washington

43

Customer Loyalty index is 4.67 on a 5.0 scale, well above our target level. Customer engagement, as measured by the Gallup company, is also approaching world-class levels. Both of these measures demonstrate that our value proposition continues to resonate with customer-members. Going forward, we’re addressing additional ways to make it easier for customers to do business with us.

During 2015 we continued to enhance our stewardship activities and contributions, as highlighted in our new 2015 Stewardship Giving Report. We intentionally exceeded our original giving targets based on greater income in 2015 and the board’s desire to increase support for rural communities. In total, Northwest FCS provided more than $1.7 million in 2015 to support local communities, youth, education and research, military veterans and crisis relief.

Human Resource Capability The strength of our business has always been defined by the quality of our people and our performance-driven culture. We know high-caliber people differentiate this organization and will serve as the foundation of our success.

Our recruiting efforts in 2015 have been significantly enhanced by University Relations Teams, led by state presidents. Deepening our relationships with land grant universities has helped us attract an abundance of promising young people to fill our talent pipeline. Our employee referral program, internships and college scholarship programs also ensure we’re continually bringing qualified, ag-focused talent into the organization and building bench strength for the future.

In 2015 employee engagement results increased from last year’s very high marks. Gallup defines engagement as an employee’s involvement with, commitment to and satisfaction with work. These results are approaching world class when measured against Gallup’s level database. We continue to devote considerable time nurturing and developing our human resource talent, which is a source of our distinct competitive advantage when it comes to serving customers.

Operational CapacityData governance and information security continue to be priority focus areas. We’ve heightened our efforts to make sure the company’s information is accurate, well

organized and highly secure. To this end, we launched a new secure messaging solution in 2015 to improve our ability to communicate securely with our customers and business partners.

Annually our board and management team identify six to ten key risk areas in conjunction with our strategic planning process. We monitor these risks closely — from political risk to credit risk — with strong oversight from the board. Unlike many areas of the country, the Northwest is extremely diverse. We must stay closely in tune with all markets to address credit risk and volatility, particularly when significant changes develop.

Financial Capacity By all measures, 2015 was another solid year for financial performance. Your cooperative earned a record $255.6 million in 2015, up 12.1 percent from $228.1 million in 2014. Credit quality continues to be strong, but we are experiencing some challenges with lower commodity prices. Our capital grew to $2.1 billion in 2015, up from $1.9 billion in 2014. Going forward, projected financial scenarios indicate that our sound capital position and strong capital ratios will be maintained when new capital regulations are issued.

As a result of our strong financial capacity, we have increased our cash patron-age from 0.75 percent to 1.0 percent of a customer’s eligible average daily loan balance during the year. Consistent with the last change in 2011, we plan to maintain patronage at this level. The patronage increase was carefully consid-ered by our board and management team. Based on our earnings, reserves and capital levels, it was clear that sharing a higher percentage of the association’s earnings would not weaken the risk-bearing capacity of the organization, nor would it limit our ability to serve growing credit demands in the future.

Looking AheadIn 2015 we saw numerous headwinds develop and the next several years will likely be more volatile. The strength of the dollar, combined with slowing demand in China, will likely strain many sectors of the agricultural economy. Volatility will continue to define the markets we serve. Yet, producers we work with in the Northwest are highly attuned to changes happening in the marketplace.

Understanding the cycles and working with customer-members as they navigate through these challenging times is what sets Northwest FCS apart.

Building our capacity to be a reliable, dependable source of credit and a trusted advisor to the customers we serve is our sole focus, just as it has been for the past 100 years. The future of Northwest agriculture is bright. Thank you for your continued business and trust in us.

Earnings

$228.12014

$236.92013

$187.32012

$159.22011

$255.62015

($ in millions)($ in billions)Capital

$1.92014

$1.82013

$1.62012

$1.42011

$2.12015

100 Years and Still GrowingNorthwest FCS | 2015 Annual Report

Agriculture has been, and will continue to be, one of America’s greatest success stories. Through perseverance, innovation and hard work, producers are not only feeding people here at home, but also those around the world. One hundred years ago the Farm Credit System was created by Congress in recognition of the vital role of agriculture. Through 100 years of change and volatility, we’re proud to have played a role in helping farm families and their businesses flourish.

While we honor our rich history during this centennial, our focus is on the future. Northwest FCS is exceptionally well positioned to serve the needs of our customer-members and future generations as they grow and evolve to meet the many challenges associated with global food and fiber production, processing, distribution and marketing.

In 2015 Northwest FCS continued to strengthen its capacity in each of the four foun-dational areas of our business — relationships with customer-members, talented and passionate employees, operational efficiencies and a strong financial profile.

Customer CapacityWe are seeing the anticipated benefits of organizational changes we made in 2015 to streamline our delivery channels and add executive leadership positions in the four Northwest states. Marketing efficiencies, favorable feedback from customers and enhanced interaction with employees is occurring as a result of these changes. Our

CEO Insights

Phil DiPofi,President and CEO

Honoring our Stakeholders

Since the beginning, farmers and ranchers have been there for

America. Feeding. Energizing. Innovating. Since 1916 we’ve been

there too, helping them show a nation and the world what hard

work and perseverance can achieve.

We recognize and honor the countless people who have made

agriculture and Farm Credit successful over the past 100

years. Numerous stakeholder groups have been there from

the start, supporting farmers, ranchers, timber producers and

commercial fishermen as they’ve adapted to a changing world

and marketplace. This year we’re telling the Farm Credit story

through their eyes, sharing the values and vision that unite us.

Farm Credit’s centennial is truly history in the making. It’s because

of you — our many stakeholders — that we’re able to support

agriculture and rural communities with reliable, consistent credit

and financial services, today and tomorrow.

Customer-membersEmployees

Ag-relatedBusinesses

GovernmentEntities

Ag OrganizationsColleges andUniversities

RuralCommunities

Farm CreditAdministration

(Regulators)

Other LendersElected Officials

It’s a milestone reached by very few.One hundred years.

65 100 Years and Still GrowingNorthwest FCS | 2015 Annual Report

Even-handed in Downturns base. But more important, the property included a large reservoir to store water on the rugged rangeland. It was a once-in-a-lifetime opportunity.

“Bill has always been a conservative, low-cost operator and a man of his word,” says Tom. “He also knew how to irrigate and move water, something we didn’t see a lot of at the time. The loan was a huge step, but in the end we knew Bill was going to be very successful. And he is.”

Today, Bill’s son Craig, wife Conni, grandson Wayne and wife Taylor help manage the 1,200-head operation on some 60,000 acres of private, state and federal land. Conni served nine years as a local advisor for Northwest FCS in Glasgow. In two short years Bill and Corky will pay off the real estate loan that made all the difference. You can bet Tom will be there for the mortgage-burning shindig.

The Bill French Family • Malta, Montana

Imagine seven years of drought, plummeting land values and 12 percent interest rates. Bill French and Tom Schmitt remember the time well. It was the late 1980s in Northeast Montana. Bill had been raising cattle here since 1958 and was serving on Farm Credit’s Federal Land Bank board. Tom was a young credit officer fresh out of college doing everything he could to help customers in trouble restructure their loans.

“I always believed in Farm Credit and the Federal Land Bank,” says Bill. “I knew they weren’t in the land acquisition business like some others, just loaning

money to foreclose on people. When times got tough they tried to hold down interest rates and almost drained their reserves because people like us needed the support. They stayed with us.”

Bill and wife Corky were still highly leveraged in 1991 when the neighboring property came up for sale. The purchase would double the size of their land

87

Craig French, Relationship Manager Whitney Tatafu and Conni FrenchCorky and Bill French


Bill French with Tom Schmidt,Senior VP of Insurance Services

Bill French with his favorite horse Blaze in the 1970s

The Venell Family • Corvallis, Oregon

Clarence Venell’s relationship with Farm Credit began in 1947 when he borrowed $2,000 to buy a combine. Clarence was a young man with big plans. With Farm Credit financing and wife Rosetta by his side, he grew the family’s wheat and grass seed operation into a vertically integrated business, farming close to 15,000 acres. Then the 1980s downturn hit. The Farm Credit System and their customers were in trouble. Loan limits were dropping quickly. The Venells had no choice but to move their operating line to a commercial lender.

“We always treasured our relationship with Farm Credit,” says Rosetta. “But with our size, they couldn’t handle us back then. They were stretched and we were stretched. We found another loan officer, followed him, and eventually ended up with a large, commercial bank. One day the bank said they weren’t going to fund agriculture anymore. We came back to Northwest Farm Credit in 2005 and it’s been a good relationship.”

The Venells continue to make bold steps to increase productivity and efficiency with son Larry leading the way. He and his neighbors recently completed an impressive irrigation project with financing from Northwest FCS. Today the irrigation district brings water from the Willamette River through a series of pipelines and natural waterways to irrigate more than 7,000 acres. With water, the Venells are now expanding into higher-value crops like mint and hazelnuts.

“We’ve continued to gather assets and grow stronger,” says Larry. “In the latest downturn in ’07, we talked more about growing higher value crops than we did wondering if our lender was going to stay with us. With the trust we’ve built, it was a completely different decision-making process.”

“For us everything is aboutrelationships and interest rates. I may pay a little more in interestif I know the person on the other sideis going to stand with us when timesget tough.”

Clarence and Rosetta Venell

Clarence farming north of Corvallis in 1949

- Larry Venell (right)with Relationship Manager Jeff Johnson 109 100 Years and Still GrowingNorthwest FCS | 2015 Annual Report

“Flip is a banker and he’s a friend,” says Calvin. “He’s somebody who helped us grow this whole operation. Flip works with so many different farms and farmers. He sees what works and what doesn’t work. He knows the numbers and he understands the big picture. You just can’t put a price tag on that knowledge.”

The Danreuther Family • Loma, Montana

Calvin Danreuther was just 22 when he and his brother applied for a loan more than 30 years ago. They fully anticipated a rejection letter, but it never came. Instead, a young credit officer named Flip Zeren recognized their potential. Flip has always had an eye for hard-working, smart go-getters with a little risk on the line.

The Danreuther Family

Trusted Advisors

Today, Calvin and wife Michelle farm with their son, two daughters and their families. The next generation is raising young families and learning the business. Managing risk with four families involved demands a heightened level of planning and communication. Calvin says that’s why he trusts his crop insurance to Shawn Fladager.

“Last year we had a storm blow through and before I even pulled up to the field Shawn is calling me,” says Calvin. “He knew we’d gotten hit before I did. Shawn got the ball rolling with adjusters before I ever would have done it myself.

“The people at Northwest Farm Credit work with you. They’ll give you information and

benchmark numbers you can go from. When you have all that right at your fingertips

why would you go anywhere else?”- Calvin Danreuther (right)

with Crop Insurance Agent Shawn Fladagerand Relationship Manager Flip Zeren Today’s world moves so fast and timeliness is everything. Shawn and Flip

don’t work bankers’ hours, they work farmers’ hours. Every time I want to get a hold of them, I do. That’s huge to us.”

Calvin and Flip have formed a trusted relationship over the years. They share a love for agriculture and the great Montana outdoors. When they’re not talking business they may share a hunting story or two, about chasing coyotes or bagging a five-point buck.


Cooperative StructureRick Waitley • Meridian, Idaho

Rick Waitley is a passionate advocate for cooperatives. Growing up, his dad sold milk to the local co-op and bought all his fertilizer and petroleum from member-owned businesses. Back in high school Rick visited the American Institute of Cooperatives in Virginia. Rick was so inspired he chose The Role Cooperatives Play in American Agriculture for his FFA public speaking contest. Rick is a natural when it comes to promoting member co-ops. He’s been a compelling voice for Northwest FCS and agriculture in the Idaho legislature for more than 12 years.

“I’ve always respected the grassroots nature of cooperatives,” says Rick. “Northwest Farm Credit Services’ efforts start with their Local Advisors and continue up to a board of directors elected by their peers. These producers are model farmers, respected citizens in their communities with good leadership skills. This bubbles up through the entire organization. We work with a lot of cooperatives and Northwest Farm Credit is part of that family. They always care about what’s best for their customer-members and the patrons they serve.”

Rick Waitley, Lobbyist, Association Management Group Rich Thornton, National Tax Partner, Moss Adams, LLP

IntegrityRich Thornton • Portland, Oregon

“Integrity is all about character and culture,” says Rich Thornton, a National Tax Partner at Moss Adams, LLP. Rich has worked closely with Northwest FCS customers and lending staff for nearly 30 years. As a certified public accountant, he knows how important it is to understand the industries and customers he serves. He’s also committed to helping families pass on their businesses to the next generation. Rich has been a featured speaker at Northwest FCS’ Family Business Succession Seminars for the past 12 years.

“The people at Northwest Farm Credit always handle themselves with integ-rity,” says Rich. “Their culture breeds the type of environment that attracts really great people and brings out the best in them. These people care about you, your business and your family. They’re investing in customer education for the next generation of management and leadership, which is pretty unique in the lending business. Northwest Farm Credit wants their customers to be successful long term. When it comes to integrity, I truly believe if you do the right thing, things turn out right.”


Relationship Manager Gina Bryan, Scott Nelson and Forest Products SVP Herb Sanders

side, Northwest FCS uses the strength of the Farm Credit System by participat-ing with eight associations across the country. When the housing market crashed in 2008 this team of lenders stood strong.

“The Farm Credit System has been spectacular during the downturn,” says Scott. “Initially our demand was down 80 percent below normal. We’re probably still 40 percent below normal today. But during the downturn our company made amazing progress. We have a very unique relationship with our lending institutions led by Northwest Farm Credit. They’ve been a shining example of the right way to do business in a down cycle.”

Rosboro’s loading dock in the 1940s

Strength of the Farm Credit System

1615

“Life is too short to do business with people you don’t want to be around. The Farm Credit System is full of high-character people that are flat outa pleasure to do business with.” - Scott Nelson (center)


turing company. “They understand the markets and bring reasonable prices. Patronage is a competitive advantage. But in the long term, the most important thing is their people. They do a great job understanding a client’s business and industry so they bring common sense to the decision-making process. They loan money to people, not just a spreadsheet.”

Today Northwest FCS takes the lead for the Farm Credit System on Rosboro’s revolving line of credit and term loans. On the revolver side, Herb Sanders and Gina Bryan with Northwest FCS work closely with several Farm Credit partners and commercial banks to manage risk and secure capital. On the real estate

Scott Nelson • Springfield, Oregon

Scott Nelson has worked closely with the Northwest FCS team for over 20 years. Back then, Scott was a chief financial officer for a timber company looking to raise significant capital. Most of the big, land-buying deals were financed through the sale of securities to large investors, banks or mutual funds. Revolving lines of credit were typically done by commercial banks. Scott wondered why term loans and operating lines couldn’t be brought together in the same lending relationship. That’s when he turned to Northwest FCS and the Farm Credit System.

“Farm Credit has solid capital that can come to the table very quickly,” says Scott, now chief executive officer of Rosboro, an integrated timberland and manufac-

CommitmentMarty and Denise Peterson • Woodland, Washington

Marty Peterson thought he was going to be a dairyman like his father. But plans changed quickly when the family reluctantly sold their cows during a govern-ment buyout in 1987. Marty, his dad and brother turned to growing berries and row crops, eventually building a small processing plant to tray-freeze the berries they grew. Marty knew food safety standards were changing. To be a processor would require significant investment and focus. That’s when he and wife Denise turned to Northwest FCS.

“All we had back then was character,” Marty says. “We didn’t have cash or collateral, other than our house. When you step out on your own you don’t have a whole lot to start with. Northwest Farm Credit worked with me before on the dairy. I figured I could make the berry processing business work and they did too. We were high risk, but they had faith in us.”

Much has changed since Marty and Denise started Columbia Fruit in 1999. They bought their first Individual Quick Freeze tunnel in 2000. In addition to their own fruit, they started processing berries for other growers. They built their first cold storage in 2005, added a new IQF tunnel in 2007, and most recently

1817

completed a state-of-the art IQF cold-storage project. They did much of the labor themselves. Today Columbia Fruit has more than 30,000 sq. ft. of production capacity and some 70,000 sq. ft. of cold storage and warehousing.

“Northwest Farm Credit helped us finance everything,” says Marty. “We would not be here without them. They’re invested in agriculture for the long haul, which you see with their young producer and succession planning programs. They’re in business to help people become stronger and better. ”

Relationship Manager Justin Becker with Marty Peterson and son-in-law Jack Devine

- Marty (right) and Denise Peterson

The Peterson Family

“With four kids and theirfamilies in this business we’ve done succession planning with

Northwest Farm Credit. They know us. They get it. They care about the

people they’re loaning money to.”

Northwest FCS | 2015 Annual Report

Knowledge

“Being involved with a lender that invests literally and figuratively in what we’re doing makesall the difference.” - Ben Smith (right) with wife Gaye McNutt

“Everyone on Red Mountain said there’s only one lender you want to work with,” says Ben. “That’s when we approached Northwest Farm Credit. It was clear right from the beginning they understood the wine business. They took time to get to know us as people. We wear a lot of hats so it’s nice to have someone watching over us, a company that really cares. ”

Ben and Gaye launched Cadence Winery in 1998, now located in an industrial-chic urban area just south of Seattle. Cadence is renowned for its Bordeaux-inspired blends, using grapes from three Red Mountain vineyards, including their own Cara Mia Vineyard. Cadence produces a limited amount of fine-blends with prices ranging from $25 to $60 a bottle.

Ben and Gaye were well on their way in 2008. They had a track record with fabulous reviews and sold-out vintages. Two years earlier their vineyard estate yielded its first usable crop. The first estate vintage from the Cara Mia Vineyard was released in ’08, just when the economy crashed. Premium wine makers were especially hard hit.

“Northwest Farm Credit was a huge help then,” says Gaye. “Thankfully, we had a banker who was calm and understood the long view when we needed to increase our operating line. They were clearly concerned about what was best for us. They know our business. And they knew this was a short-term, external event. We’re grateful for their knowledge and the trust they have in us.”

Gaye McNutt and Ben Smith • Seattle, Washington

Ben Smith and wife Gaye McNutt are curious, life-long learners. Ben is a mechanical engineer and Gaye is an attorney. Neither grew up on a farm. Ben’s passion for making fine wine started at The Boeing Company with a thriving club of amateur, home winemakers. When Ben and Gaye were dating

in the mid ‘90s, they bought 10.5 acres together on Red Mountain, now one of Washington’s premiere grape-growing regions. They spent years doing research on the feasibility of a commercial winery, but finding a lender with a deep understanding of the industry was easy.


Gaye and Ben with daughter Cara, the namesake for Cara Mia Vineyards

who is also bringing in a new generation of promising, young professionals.

Allison Jenkins’ family raised seed potatoes. She always wanted to be involved in agriculture, so she did her college internship at Northwest FCS. With a degree in agribusiness she was hired full time in 2011 to work in the Nampa, Idaho branch. As fate would have it, she’s now managing a lending relationship with the Blanksmas who bought seed potatoes from her family for two generations.

“I’ve really grown to appreciate the relationship we have with Northwest Farm Credit,” says Jeff Blanksma Jr. “They know our industry and they’ve taken time to understand how we run our operation to maintain our financial position.”

Admittedly, the next generation has yet to experience a serious downturn in agri-culture. But they know it’s coming. And when it does they’ll rely on what they’ve learned from their parents, professors, mentors and peers. If the Blanksma brothers and Allison are an indication of the future, agriculture is in good hands.

RelationshipsThe Blanksma Family • Hammett, Idaho

Building relationships comes naturally to Jeff and Nancy Blanksma. They’re just that kind of people. They continually look for ways to help others grow and be successful. Many of their employees have worked with them for 25 years or more. Yet, Jeff and Nancy also seem to know intuitively how to transition responsibility and relationships to the next generation.

Their sons, Jeff Jr. 41 and Nick 33, now run the day-to-day operations farming 4,400 acres. Both have college degrees. Jeff Jr. serves on Northwest Farm Credit Services’ Local Advisory Committee and Nick is the youngest board member ever appointed to the Idaho Potato Commission. For years they’ve been doing the farm budgets — with oversight from their folks — and working with a lender

Jeff Blanksma Jr. with brother Nick

“When Allison took over from her predecessor the transition was smooth and seamless. We were comfortable and confident from the get go. She is more than capable. She’s smart and handles her business and job well.” - Jeff Blanksma Sr. (right)

2221

Relationship Manager Allison Jenkins with Jeff Sr. and Nancy Blanksma


2423

Focused on Food and FiberDr. John Foltz • Moscow, Idaho

Dr. John Foltz has spent more than two decades educating people about the food and fiber industries in the U.S. and around the world. As an economist, he talks about the “multiplier effect” agriculture has on the general economy, providing jobs and tax revenue to support rural communities and broad economic growth.

John is also passionate about helping young people discover new opportunities to grow. That’s why a large number of University of Idaho graduates in agriculture and life sciences now work at Northwest FCS.

“We share a similar mission with Northwest Farm Credit Services, to serve agriculture and agribusinesses,” says John. “Our role as a land grant university is to provide the human capital. We offer well-educated employees, research and grower outreach through our extension programs. Northwest Farm Credit provides the financial capital. And they share their expertise with customers through their employees, educational programs and market studies. Agriculture is vital to our economy. People will always need food. The Farm Credit System is an incredibly vital cog in the wheel that serves the economy and our society.”

Fulfilling the Mission

Doc Hastings, Retired, U.S. House of RepresentativesDr. John Foltz, Special Assistant to the President for Agricultural Initiatives,

University of Idaho


Doc Hastings • Pasco, Washington

Doc Hastings represented Washington’s 4th Congressional District in the U.S. House of Representatives for 20 years before retiring in 2015. He knows the challenges agricultural producers face and the economic impact of their hard work. The 4th district in Central Washington is one of the most diverse agricul-tural regions in the Northwest, producing hundreds of different commodities.

During his terms in office, Doc served with numerous members of Congress from large urban areas. He says many don’t realize what it takes to bring food products to market both in the U.S. and abroad.

“Agriculture is a vital part of our economy,” says Doc. “At the turn of the 19th century we were still largely an agrarian society. A hundred years ago if some-one said the agricultural sector would be reduced to 2 percent of the population and still be able to produce the amount of food we do today, people would have thought they were crazy. Yet, that’s exactly what American agriculture has done. Farm Credit has been an integral part of this expansion.”

25

IDAHOLogan Alder MaladRobert Ball HamerJeff Bartschi MontpelierCody Bingham JeromeJeff Blanksma, Jr. HammettAdrian Boer JeromeConnie Christensen BlackfootBrent Clayton AmmonCraig Corbett GraceCade Crapo St. AnthonyRon Elkin BuhlCarl Ellsworth LeadoreBruce Foster AberdeenDavid Funk HansenBrent Griffin RupertBurke Hillman HamerBrian Huettig HazeltonJoshua Jones TroyKryst Krein American FallsDerek Larson BurleyBrent Lott Idaho FallsKaren Lustig CottonwoodMarty Lux NezperceRay Matsuura BlackfootKyle Meyer RathdrumRon Mio FruitlandGreg Moss KetchumLisa Patterson HeyburnGreg Payne CaldwellErick Peterson MoscowRoyce Schwenkfelder CambridgeScott Searle ShelleyChad Stibal BlackfootRobert Swainston PrestonRyan Telford RichfieldDale Thomas GoodingCamellia Thurgood NampaJustin Tindall BruneauRitchey Toevs AberdeenSteven Toone GraceGreg Troost ParmaJames Udy American FallsTodd Webb DecloShane Webster RexburgPete Wittman LapwaiMatt Wolff Boise

OREGONMonet Allen Montague, CAReed Anderson BrownsvilleRoben Arnoldus CoveGlenn Barrett BonanzaAlex Blosser DundeeJohn Boyer HainesRyan Boyle MadrasRon Brown Milton-FreewaterGeorge Bussmann SixesWarren Chamberlain ValeJason Chapman Klamath FallsTim Dahle The DallesDan Dawson RoseburgKarl Dettwyler SilvertonPaul Denfeld HillsboroMike DeWall HarrisburgRod Fessler MadrasTom Fessler Mt. AngelJoe Finegan CorneliusBruce Ford HermistonJavier Goirigolzarri RoseburgLevi Hermens WallowaShauna Hinton Montague, CAMatt Insko LaGrandeKenneth Jensen ValeKyle Kenagy RoseburgAlan Keudell AumsvilleDiane Kunkel PortlandLeland Lage Hood RiverSharon Livingston Mt. VernonBill Martin RufusScott McClaran JosephRon Meyer TalentEric Mockridge BonanzaGreg Myers TillamookDavid Neal TangentLarry Parker HelixAlan Parks Silver LakeAmy Doerfler Phelan AumsvilleJohn Reerslev Junction CityStephen Roth BrothersShannon Rust EchoMarc Staunton MerrillAnna Sullivan HerefordSteve Walker StanfieldEric White Nyssa

WASHINGTONDave Allan WapatoRanferi Arteaga TietonLoren Beale PomeroyJeff Bosma OutlookRuss Byerley TouchetRoger Canfield OlympiaBill Clark ChelanMike Cobb EphrataBill denHoed GrandviewRichard DeRuwe DaytonFrank DeVries LyndenJill Douglas PascoPatrick Escure QuincySteve Fish Sitka, AKStacy Gilmore PascoAlan Groff WenatcheeLori Hayles PascoDavid Hubbard DavenportIan Jefferds CoupevilleCris Kincaid PullmanSteve Krupke ReardanDavid Lange ColfaxJosh Lawrence Royal CityPoppie Mantone BingenJohn Miller ToledoKyle Morscheck ClarkstonPat Murphy ChehalisJerry Nelson BurlingtonBrian O’Leary SeattleEric Olson Anchorage, AKSara Rolfs WenatcheeBrenton Roy ProsserMichael Roy MoxeeJason Salvo SeattleDerek Schafer RitzvilleJeff Schilter OlympiaDanielle Scrupps RitzvilleBen Smith SequimJerry Smith Benton CityJim Stone LakewoodLori Stonecipher Walla WallaMark Tudor GrandviewJake Wardenaar Royal CityAndy Werkhoven Monroe

Local AdvisorsMONTANALes Arthun WilsallDavid Bell Great FallsBill Bergin MelstoneMark Bergstrom BradyAdam Billmayer HogelandBart Bitz Big SandyRyan Bogar VidaJonathan Bolstad HomesteadKeven Bradley Cut BankSandy Carey BoulderCalvin Danreuther LomaNels DeBruycker ChoteauVicki Eggebrecht MaltaNate Finch DillonWarren Flynn TownsendJoe Fretheim ShelbyScott Glasscock AngelaBeth Granger Great FallsGreg Grove MoccasinChad Hansen DillonCraig Henke ChesterCourtney Herzog RapeljeDale Hirsch KinseyAlan Klempel BloomfieldSteve Lackman ForsythTim Lake PolsonAndrew Maki CorvallisBryan Mussard DillonCorie Mydland JolietKen Olson RicheyJon Owen GeraldineMiles Passmore SomersTracey Pearce SheridanRobert Peterson HobsonTrudi Peterson Judith GapShawn Rettig RudyardDave Sattoriva HinghamNancy Schlepp RinglingShon Simonson LoringCarmie Steffes PlevnaSteve Swank ChinookKurt Swanson ValierDuane Talcott HammondDale Tarum RichlandBob Taylor DentonKelly Toavs Wolf PointMark Tombre SavageMiles Torske HardinBrian Tutvedt KalispellLarry Tveit, Jr. FairviewMike Wallewein ConradSteve Wood Sheridan

Northwest FCS | 2015 Annual Report

As of 1.15.2016

We support agricultureand rural communities with reliable,consistent credit and financial services,today and tomorrow.

2015 NORTHWEST FARM CREDIT SERVICES, ACA Annual Report to Stockholders

2015 ANNUAL REPORT 262015 ANNUAL REPORT 26

N O R T H W E S T F A R M C R E D I T S E R V I C E S , A C A

REPORT OF MANAGEMENT The financial statements of Northwest Farm Credit Services, ACA and its wholly owned subsidiaries

(Northwest FCS) are prepared by management, which is responsible for their integrity and

objectivity, including amounts necessarily based on judgments and estimates. The financial

statements have been prepared in conformity with accounting principles generally accepted in the

United States of America, and, in the opinion of management, fairly present the financial condition

of Northwest FCS. Other financial information included in the 2015 Annual Report to Stockholders

is consistent with that in the financial statements.

To meet its responsibility for reliable financial information, management depends on Northwest

FCS’ accounting and internal control systems, which have been designed to provide reasonable,

but not absolute, assurances that assets are safeguarded and transactions are properly authorized

and recorded. The systems have been designed to recognize that the cost must be related to the

benefits derived. To monitor compliance, the Internal Audit staff performs audits of the accounting

records, reviews accounting systems and internal controls, and recommends improvements as

appropriate. The financial statements are audited by PricewaterhouseCoopers LLP, independent

auditors. Northwest FCS is also examined by the Farm Credit Administration.

The Chief Executive Officer, as delegated by the Northwest FCS Board of Directors, has overall

responsibility for Northwest FCS’ system of internal controls and financial reporting. The board has

delegated significant responsibility to the Audit Committee, which is comprised entirely of directors

who are independent of Northwest FCS’ management. The Audit Committee meets periodically

with management, independent auditors and internal auditors to ensure they are carrying out their

responsibilities. The Audit Committee is also responsible for performing an oversight role by

reviewing and monitoring the financial, accounting and auditing procedures of Northwest FCS in

addition to reviewing Northwest FCS’ financial reports. The independent auditors and internal

auditors have full and free access to the Audit Committee, with or without the presence of

management, to discuss the adequacy of the internal control structure for financial reporting and

any other matters they believe should be brought to the attention of the committee.

The undersigned certify that they have reviewed the 2015 Annual Report to Stockholders and it

has been prepared in accordance with all applicable statutory or regulatory requirements and the

information contained herein is true, accurate and complete to the best of our knowledge and

belief.

Phil DiPofi

President and CEO

March 7, 2016

Tom Nakano

EVP-Chief Administrative and

Financial Officer

March 7, 2016

David B. Hedlin

Chair of the Board

March 7, 2016

27 NORTHWEST FCS


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Northwest FCS is responsible for establishing and maintaining adequate internal

control over financial reporting for Northwest FCS’ consolidated financial statements. For purposes

of this report “internal control over financial reporting” is defined as a process designed by or

under the supervision of Northwest FCS’ principal executives and principal financial officers, or

persons performing similar functions, and effected by its board of directors, management and

other personnel, to provide reasonable assurance regarding the reliability of financial reporting

information and the preparation of the consolidated financial statements for external purposes in

accordance with accounting principles generally accepted in the United States of America and

includes those policies and procedures that: (1) pertain to the maintenance of records that in

reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of

Northwest FCS, (2) provide reasonable assurance that transactions are recorded as necessary to

permit preparation of financial information, and that receipts and expenditures are being made

only in accordance with authorizations of management and directors of Northwest FCS, and (3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,

use or disposition of Northwest FCS’ assets that could have a material effect on its consolidated

financial statements.

Northwest FCS’ management has completed an assessment of the effectiveness of internal control

over financial reporting as of December 31, 2015. In making the assessment, management used

the framework in Internal Control—Integrated Framework (2013), promulgated by the Committee

of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO”

criteria.

Based on the assessment performed, Northwest FCS concluded that as of December 31, 2015, the

internal control over financial reporting was effective. Additionally, based on this assessment,

Northwest FCS determined there were no material weaknesses in the internal control over financial

reporting as of December 31, 2015. There were no material changes in the internal control over

financial reporting during the year ended December 31, 2015.

Phil DiPofi

President and CEO

March 7, 2016

Tom Nakano


Financial Officer

March 7, 2016

David B. Hedlin

Chair of the Board

March 7, 2016



REPORT OF AUDIT COMMITTEE The Audit Committee is composed of six members of the Northwest FCS Board of Directors. In

2015, the Audit Committee met five times in person and participated in two conference calls. The

Audit Committee oversees the scope of Northwest FCS’ internal audit program, the independence

of the outside auditors, the adequacy of Northwest FCS’ system of internal controls and procedures

and the adequacy of management’s action with respect to recommendations arising from those

auditing activities. In addition, the Audit Committee approved the appointment of

PricewaterhouseCoopers LLP (PwC) as independent auditors for 2015. The Audit Committee’s

responsibilities are described more fully in the Internal Controls Policy and the Audit Committee

Charter.

Management is responsible for internal controls and the preparation of the financial statements in

accordance with accounting principles generally accepted in the United States of America. PwC is

responsible for performing an independent audit of the financial statements in accordance with

generally accepted auditing standards in the United States of America and for issuing its report

based on the audit. The Audit Committee’s responsibilities include monitoring and overseeing these

processes.

In this context, the Audit Committee reviewed and discussed the audited financial statements for

the year ended December 31, 2015, with management. The Audit Committee also reviewed with

PwC the matters required to be discussed by Statement on Auditing Standards No. 114, as

amended (Communication with Audit Committees). PwC and the internal auditors directly provided

reports on significant matters to the Audit Committee.

The Audit Committee received the written disclosures and the letter from PwC in accordance with

Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees)

and discussed with PwC its independence. The Audit Committee requires prior approval of all non-

audit services provided by PwC. The Audit Committee has discussed with management and PwC

such other matters and received such assurances from them as the Audit Committee deemed

appropriate.

Based on the foregoing review and discussions, and relying thereon, the Audit Committee

recommended the Northwest FCS Board of Directors include the audited financial statements in the

annual report as of and for the year ended December 31, 2015.

Christy Burmeister-Smith

Chair of the Audit Committee

March 7, 2016

Susan Doverspike

Dave Nisbet

Kevin Riel

Nate Riggers

Karen Schott

29 NORTHWEST FCS


FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes the financial condition and results of operations of Northwest

Farm Credit Services, an Agricultural Credit Association (ACA), and its wholly-owned subsidiaries

(collectively referred to as Northwest FCS) for the year ended December 31, 2015. The

commentary should be read in conjunction with the accompanying Consolidated Financial

Statements and Notes. Dollar amounts are in thousands unless otherwise stated.

Northwest FCS quarterly and annual reports to shareholders may be obtained free of charge on

Northwest FCS’ website, www.northwestfcs.com or upon request at Northwest Farm Credit

Services, ACA, P.O. Box 2515, Spokane, Washington 99220-2515 or by telephone at (509) 340-

5300 or toll free (800) 743-2125.

The Consolidated Financial Statements were prepared under the oversight of the Audit Committee.

Forward-Looking Statements Certain statements contained in this report that are not historical facts are forward-looking

statements within the meaning of the Private Securities Litigation Reform Act. Actual results may

differ materially from those included in the forward-looking statements that relate to plans,

projections, expectations and intentions. Forward-looking statements are typically identified by

words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “may,”

“will,” “should,” “would,” “could” or similar expressions. Although it is believed that information

expressed or implied in such forward-looking statements is reasonable, no assurance can be given

that such projections and expectations will be realized or the extent to which a particular plan,

projection, or expectation may be realized. These forward-looking statements are based on current

knowledge and are subject to various risks and uncertainties, including, but not limited to:

fluctuations in the agricultural, energy, international and leasing industry sectors; weather,

disease, and other adverse climatic or biological conditions that impact agricultural productivity and

income; United States and global economic conditions; sovereign or regulatory actions; the level of

interest rates; changes in assumptions underlying the valuations of financial instruments; changes

in estimates underlying the allowance for credit losses; economic conditions and credit

performance of the loan portfolio, growth and seasonal factors; tax reform; the effect of banking

and financial services reforms; possible amendments to, and interpretations of, risk-based capital

guidelines and reporting instructions; the ability of states to adopt more extensive consumer

privacy protections through legislation or regulation; the resolution of legal proceedings and

related matters; and nonperformance by counterparties to derivative positions.

Business Overview

Farm Credit System Structure and Mission

Northwest FCS is one of 74 associations in the Farm Credit System (System), which was created by

Congress in 1916 and has served agricultural producers for 100 years. The System’s mission is to

provide sound and dependable credit to American farmers, ranchers, producers or harvesters of

aquatic products, rural residents and farm-related businesses through a member-owned

cooperative system. This is done by making loans and providing financial services. Through its

commitment and dedication to agriculture, the System continues to have the largest portfolio of

agricultural loans of any lender in the United States. The Farm Credit Administration (FCA) is the

System’s independent safety and soundness federal regulator and was established to supervise,

examine and regulate System institutions.

Structure and Focus

As a cooperative, Northwest FCS is owned by the members it serves in territories that extend

across a diverse agricultural region consisting primarily of Washington, Idaho, Oregon, Montana

and Alaska. Northwest FCS makes production or operating, intermediate-term and long-term real

estate mortgage loans to farmers, ranchers, rural residents, and agribusinesses. Additionally,

Northwest FCS also serves as an intermediary in offering credit life insurance, federal multi-peril

crop insurance programs, including the Whole-Farm Revenue Protection (WFRP) program, named

peril/crop hail insurance, advance conditional payment accounts and provides additional services to

customers such as fee appraisals and business management services. Northwest FCS success

begins with its extensive agricultural experience and knowledge of the market and is dependent on

the level of satisfaction provided to its customers.

As part of the System, Northwest FCS obtains funding for its lending and operations from CoBank,

ACB, and its wholly-owned subsidiaries (CoBank), which is one of the four Farm Credit System

Banks. CoBank is a cooperative of which Northwest FCS is a member. CoBank, its related

associations, and AgVantis Inc. (AgVantis) a technology service corporation, are referred to as the

District.

31 NORTHWEST FCS

Northwest FCS, along with the customers’ investment in the association, is materially affected by

CoBank’s financial condition and results of operations. The CoBank quarterly and annual reports

are available free of charge on CoBank’s website, www.cobank.com, or may be obtained at no

charge by contacting Northwest FCS. Annual reports are available within 75 days after year end

and quarterly reports are available within 40 days after the calendar quarter end.

2015 Financial Highlights The year ended December 31, 2015 was another year of strong financial performance for

Northwest FCS. A strong balance sheet and record earnings provide a solid foundation for the

future. Highlights include:

• Earnings of $255,601 in 2015, a 12.0 percent increase from $228,120 in 2014, primarily due

to continued loan growth and positive credit quality trends.

• Loan portfolio volume increased 3.6 percent in 2015, with an ending total loan and accrued

interest balance of $10.2 billion. During the same period nonaccrual loan volumes declined

significantly by $20,135, or 44.7 percent.

• Capital levels remained strong and well in excess of regulatory minimums. As of December

31, 2015, members’ equity totaled approximately $2.1 billion, an increase of 8.6 percent from

December 31, 2014 primarily due to earnings, partially offset by the patronage distribution

accrued of $91,900.

• Strong earnings, reserves and capital position allowed Northwest FCS to declare a cash

patronage distribution representing a return of 100 basis points for the majority of eligible

customers based on average 2015 loan balances, an increase from 75 basis points in 2014.

Commodity Review and Outlook The following highlights the general health of agricultural commodities with the greatest

concentrations in Northwest FCS’ loan portfolio.

Forest Products: The forest products industry continues to experience a lethargic, but sustained,

recovery as demand improves, supported by employment and household formation increases.

Demand improvements are met with increasing lumber supplies from the U.S. and Canadian

imports. Overall, forest products companies’ results in 2015 are below 2014 performances.

Dairy: Headwinds facing the dairy industry include strong global production, reduced milk exports

and falling cull cow prices. In international markets, European Union milk production gains and

lower milk exports to China and the Middle East are pressuring markets lower. Although feed

prices are also lower, milk prices are projected below most producers’ breakeven price through the

first half of 2016.

Fruit and Tree Nuts: The principal commodity financed by Northwest FCS in this sector is apples.

The outlook for the Northwest apple industry continues to improve, supported by lower 2015-16

production, down 16.4 percent from the prior year. A smaller crop is attributed to smaller apple

size, crop damage and fewer acres in production. The Northwest rapidly sold apples with potential

heat-related condition issues in the early market. As the industry begins to sell higher quality fruit

from storage, marketers have reduced the shipping pace. Prices are rising as movement slows and

are expected to continue to climb as apple supplies dwindle in competing regions. Continued

strength in apple prices may slow as exports are constrained by a strong dollar.

Cattle and Livestock: The principal commodity financed by Northwest FCS in this sector is beef

cattle. A prolonged period of strength and steady gains resulted in historically high cattle prices

through the first half of 2015. However, market cycles pressured prices lower through year end as

the 2015 calf crop increased with rising numbers of heifers coming into calf production. Exports

were also lower through the third quarter, slowed by a strong dollar. Settling from record highs,

beef and cattle prices are expected to stabilize near the long-term trend in the next three years.

Potatoes: Although Northwest potato growers harvested more acres in 2015, production was

down almost 3 percent due to lower yields. Despite lower production, prices were down

significantly. A smaller crop is matched with quality challenges associated with an unseasonably

warm growing season. Notwithstanding these challenges, U.S. potato exports are up 4.3 percent,

while frozen potato stocks are down 4.5 percent.

Grains: The principal commodity financed by Northwest FCS in this sector is wheat. Late fall and

early winter precipitation exceeded the prior year’s levels, setting the stage for a positive start to

spring. However, record global production and ending stocks leave usable world wheat stocks at

32 percent; their highest since 2001-02. With a world flush in wheat, U.S. wheat exports are their

lowest since 1971-72, constrained by fierce foreign competition and a strong dollar. Until foreign

markets regain buying power, Northwest wheat prices are expected to stabilize around breakeven

for most producers.


For more information on the industries served by Northwest FCS, visit Industry Insights in the

Resources section of www.northwestfcs.com.

Financial Condition Loan Portfolio

Loans and accrued interest by type are presented in the following table:

Northwest FCS makes loans and provides financially related services to qualified borrowers in

agricultural and rural sectors and to certain related entities. The loan portfolio is diversified by loan

participations purchased and sold, geographic locations served, commodities financed and loan

size.

Volume of participations purchased and sold are presented in the following table (participations

purchased volume in the table excludes syndications and purchases of other interests in loans):

Loan concentrations by state are presented in the following table:

The following table shows the primary agricultural commodities produced by Northwest FCS

customers based on the Standard Industrial Classification System (SIC) published by the federal

government. This system is used to assign commodity or industry categories based on the primary

business of the customer. A primary business category is assigned when the commodity or

industry accounts for 50 percent or more of the total value of sales for a business; however, a

large percentage of agricultural operations typically include more than one commodity.

33 NORTHWEST FCS

Impaired loan volume is comprised of nonaccrual loans, restructured loans, and loans past due 90

days or more still accruing interest. Nonperforming assets consist of impaired loans and other

property owned. Comparative information regarding nonperforming assets in the portfolio,

including accrued interest where appropriate, are presented in the following table:

Nonperforming assets at December 31, 2015, decreased by $39,684 or 41.7 percent as compared

to December 31, 2014. Nonaccrual loans represent all loans where there is a reasonable doubt as

to collection of all principal and/or interest. Nonaccrual loans decreased by $20,135 at December

31, 2015, as compared to December 31, 2014, mainly driven by the loan changes summarized in

the table below. Accruing restructured loan volume decreased by $12,494 as compared to

December 31, 2014, primarily related to loan repayments. Loans 90 days or more past due and

still accruing interest decreased by $779 from December 31, 2014, and were adequately secured

and in the process of collection. Other property owned is real and personal property that has been

acquired through foreclosure or deed in lieu of foreclosure. Other property owned at December 31,

2015, decreased by $6,276 as compared to December 31, 2014, primarily due to sales during the

year.

Nonaccrual loan changes are summarized in the following table:

As of December 31, 2015, nonaccrual loans that were current as to principal and interest

installments totaled $17,107 representing 68.8 percent of the nonaccrual loan portfolio compared

to $27,844 representing 61.9 percent of the nonaccrual loan portfolio at December 31, 2014, and

$77,785 representing 89.9 percent of the nonaccrual loan portfolio at December 31, 2013.

Additional loan information is in Note 3 to the Consolidated Financial Statements.

Allowance for Credit Losses The allowance for credit losses is comprised of the allowance for loan losses (ALL) and the reserve

for unfunded lending commitments. The allowance for credit losses is the best estimate of the

amount of probable losses inherent in the loan portfolio at the balance sheet date. The allowance

for credit losses is determined based on a periodic evaluation of the loan portfolio and unfunded

lending commitments, which generally considers types of loans, credit quality, specific industry

conditions, general economic and political conditions, weather-related conditions, and changes in

the character, composition, and performance of the portfolio, among other factors. The allowance

for credit losses is calculated based on a historical loss model that takes into consideration various

risk characteristics of the loan portfolio. Northwest FCS evaluates the reasonableness of this model

and determines whether adjustments to the allowance are appropriate to reflect the risks inherent

in the portfolio.

Individual loans are evaluated based on the borrower’s overall financial condition, resources, and

payment history; the prospects for support from any financially responsible guarantor; and, if

appropriate, the estimated net realizable value of any collateral. The allowance for loan losses

attributable to these loans is established by a process that estimates the probable loss inherent in

the loans, taking into account various historical and projected factors, internal risk ratings,

regulatory oversight, geographic location, industry and other factors.


The ALL reserves at December 31, 2015, 2014 and 2013 totaled $76,500, $83,000 and $97,000,

respectively. Specific loan loss reserves at December 31, 2015, 2014 and 2013, totaled $1,796,

$7,232 and $16,405, respectively. For 2015, the specific reserve was mainly related to rural

residential real estate and general farm crops. For 2014, the specific reserve was mainly related to

the nursery industry. For 2013, the specific reserve was primarily comprised of those relationships

within the agricultural sectors that were impacted by volatility in commodity and input prices, such

as dairy, as well as those industries that were impacted by the overall downturn in the U.S.

economy, such as nursery.

Coverage of the ALL, as a percentage of certain key loan categories, is presented in the following

table:

Northwest FCS maintains a reserve for unfunded lending commitments that reflects its best

estimate of losses inherent in lending commitments made to customers but not yet disbursed.

Factors such as the likelihood of disbursement and loss given disbursement are utilized in

determining this reserve. This reserve is reported within other liabilities on the Consolidated

Balance Sheets and totaled $24,000, $27,000 and $15,000 at December 31, 2015, 2014 and 2013,

respectively.

Other Assets Other assets were $100,716 at December 31, 2015, which consists primarily of patronage

receivable from other Farm Credit entities. Others assets were $100,209 at December 31, 2014, an

increase of $8,413 as compared to 2013, primarily due to increased patronage receivables.

Other Liabilities Other liabilities were $197,016 at December 31, 2015, an increase of $41,485 as compared to

2014. The increase is primarily the result of an increase in the patronage payable from 75 basis

points in 2014 to 100 basis points of a customer’s eligible average loan balance in 2015.

Additionally, the other liabilities increase was driven by insurance proceeds held on behalf of a

customer. Other liabilities were $155,531 at December 31, 2014, an increase of $36,976 as

compared to 2013, due to an increase in the pension obligation, the reserve for unfunded lending

commitments and patronage distribution liability.

Results of Operations Net income for the year ended December 31, 2015, was $255,601, compared to $228,120 for

2014 and $236,889 for 2013. The following table provides detail of changes in the components of

net income:

Net Interest Income: Net interest income was $23,295 higher in 2015 compared to 2014

primarily due to increased loan volume. Net interest income was $10,445 higher in 2014 compared

to 2013 primarily due to the lower cost of interest bearing liabilities. Net interest income includes

$6,508, $6,224 and $6,007 of net loan fee accretion for the years ended December 31, 2015, 2014

and 2013, respectively.

Influences on net interest income from changes in effective rates on, and volume of, interest

earning assets and interest bearing liabilities between the years ended December 31, 2015, and

2014, and between the years ended December 31, 2014, and 2013, are presented in the following

tables:

35 NORTHWEST FCS

Information regarding the average daily balances and average rates earned and paid are

presented in the following table:

Credit loss reversal/Provision for credit losses: In 2015, the credit loss reversal of $12,321

was primarily the result of the decline in nonaccrual loan volume and related specific allowances,

net recoveries and a reduction in the reserve for unfunded lending commitments. In 2014, the

credit loss reversal of $2,570 was the result of the decline in nonaccrual loan volume and related

specific allowances, overall credit quality improvement and net recoveries, partially offset by an

increase in the reserve for unfunded lending commitments. In 2013, credit quality improved

significantly and net recoveries were significant, which resulted in a credit loss reversal of $34,677.

Noninterest income: In 2015, noninterest income increased $1,832 or 2.1 percent when

compared to 2014, primarily related to an increase in patronage income of $4,654 and higher

financially related services income of $3,030, offset by a decline in mineral income of $3,069 and

lower gains on sales of other property owned of $1,957. The patronage income increase was

mainly due to higher patronage income on sold loan volume and an increase in the average note

payable to CoBank as compared to the prior year. Higher financially related services income was

primarily related to increased commission rates and success with the new WFRP program. The

reduction in mineral income was mainly driven by the decline in the price of oil, and gains on sales

of other property owned were lower in the current year due to one significant sale that occurred in

the prior year.

In 2014, noninterest income increased $13,148 or 17.5 percent when compared to 2013, primarily

related to an increase in patronage income of $4,370, increased gains on sales of other property

owned of $4,168 and higher financially related services income of $2,812. The patronage income

increase was mainly due to higher patronage income on sold loan volume resulting from higher

average loan balances as compared to the prior year. The gains on sales of other property owned

increased mainly as the result of one significant transaction that occurred during 2014. The

financially related services income was driven by profit sharing with insurance companies in 2014,

compared to no profit sharing in 2013.

Noninterest expense: In 2015, noninterest expenses increased $10,937 or 8.3 percent as

compared to 2014 due to increased salaries and benefits of $6,274, other noninterest expenses of

$1,739, and insurance fund premium of $1,190. The salaries and benefits increase was mainly

due to organization realignment costs, normal merit administration, higher medical and retirement

costs, and increased incentive compensation as a result of record earnings in the current year.

Increased other noninterest expenses was primarily driven by increased stewardship activities and

contributions to support rural communities. The insurance fund premium increased due to higher

assessment rates and loan volume as compared to the prior year.

In 2014, noninterest expenses increased by $2,250 or 1.7 percent when compared to 2013. The

increase was caused in part by a reversal of a contingent liability related to a revenue tax in 2013

which reduced other noninterest expenses in that year by $1,638. The remaining increase in

noninterest expenses as compared to 2013 was driven by higher assessment rates for the

insurance fund.

Salaries and benefits includes a reduction of $6,380, $5,939 and $6,282 in deferred loan

origination costs for the years ended December 31, 2015, 2014 and 2013, respectively. Deferred

loan origination costs are periodically updated and are expected to increase in the future.

Provision for income taxes: Income tax expense was $3,540 lower than in the prior year. The

effective tax rate was 0.6 percent for the year ended December 31, 2015, as compared to 2.1

percent for 2014. The income tax expense in 2014 decreased $1,995 as compared to 2013. For

both years presented, the reduction in taxes was driven by a decline in income attributable to the

taxable portion of the business. Tax estimates are based on the income from the taxable lending

portfolio and include the effect of anticipated patronage distributions.

Liquidity and Funding Sources The primary source of Northwest FCS liquidity and funding is a direct loan from CoBank that is

reported as note payable to CoBank, ACB on the Consolidated Balance Sheets. As described in

Note 7 to the Consolidated Financial Statements, this direct loan is governed by a General

Financing Agreement (GFA) and is collateralized by a pledge of substantially all of Northwest FCS’


assets and is also subject to regulatory borrowing limits. The GFA includes financial and credit

metrics that if not maintained can result in increases to the funding costs. The GFA also requires

compliance with FCA regulations regarding liquidity. To meet this requirement, Northwest FCS is

allocated a share of CoBank’s liquid assets for calculation purposes. Northwest FCS is currently in

compliance with the GFA and does not foresee issues with obtaining funding or maintaining

liquidity.

Northwest FCS plans to continue to fund lending operations primarily through its borrowing

relationship with CoBank and from retained earnings. CoBank’s primary source of funds is the

issuance of Systemwide Debt Securities to investors through the Federal Farm Credit Bank Funding

Corporation. This access has traditionally provided a dependable source of competitively priced

debt that is critical for supporting the mission of providing credit to agriculture and rural America.

Northwest FCS has a secondary source of liquidity and funding through an uncommitted Federal

Funds line of credit with Wells Fargo. The amount available through this line is $75,000 and is

intended to provide liquidity for disaster recovery or other emergency situations. At December 31,

2015, 2014 and 2013, no balance was outstanding on this line of credit.

Asset/Liability Management In the normal course of lending activities, Northwest FCS is subject to interest rate risk. The

asset/liability management objective is monitored and managed within interest rate risk limits

designed to target reasonable stability in net interest income over an intermediate planning

horizon and to preserve a relatively stable market value of equity over the long term. Mismatches

and exposure in interest rate repricing and indices of assets and liabilities can arise from product

structures, customer activity, capital re-investment and liability management. While Northwest FCS

actively manages interest rate risk within the policy limits approved by the Northwest FCS Board of

Directors (the board) through the strategies established by the Asset/Liability Committee (ALCO),

there is no assurance that these mismatches and exposures will not adversely impact earnings and

capital. The overall objective is to develop competitively priced and structured loan products for

the customers’ benefit and fund these products with a blend of equity and debt obligations.

The interest rate gap analysis shown in the following table presents a comparison of interest

earning assets and interest bearing liabilities in defined time segments at December 31, 2015. The

interest rate gap analysis is a static indicator for how Northwest FCS is positioned by comparing

the amount of assets and liabilities that reprice at various time periods in the future. The value of

this analysis can be limited given other factors such as the differences between interest rate

indices on loans and the underlying funding, the relative changes in the levels of interest rates

over time, and optionality included in loans and the respective funding that can impact future

earnings and market value.

Northwest FCS’ repricing gap as of December 31, 2015, is characterized as slightly asset sensitive.

An asset sensitive position is favorable to the association in a rising rate environment and is less

favorable when interest rates are declining. Given some of the inherent weaknesses with interest

rate gap analysis, simulation models are used to develop additional interest rate sensitivity

measures and estimates. The assumptions used to produce anticipated results are periodically

reviewed and models are tested to help ensure reasonable performance. Various simulations are

produced for net interest income and the market value of equity. These simulations help to assess

interest rate risk and make adjustments as needed to the products and related funding strategies.

Northwest FCS’ interest rate risk management board policy establishes limits for changes in net

interest income and market value of equity sensitivities. These limits are measured and reviewed

by the ALCO monthly and reported to the board at least quarterly. The board policy limits for net

interest income and the market value of equity are a negative 15 percent change given parallel

and instantaneous shocks of interest rates up and down 2 percent. If the three-month U.S.

Treasury bill interest rate is less than 4 percent, then the downward shock is equal to one-half of

the three-month U.S. Treasury rate. In the event where the current three-month Treasury bill

interest rate is negative, Northwest FCS Treasury will coordinate with FCA and CoBank for the

37 NORTHWEST FCS

downward shock amount. The GFA also uses these simulation results to assess the interest rate

risk position and whether corrective action is necessary.

The upward and downward shocks reflected in the above table are based on parallel and

instantaneous interest rate movements of 1 and 2 percent. Due to extremely low short-term

interest rates in 2015, the 1 and 2 percent parallel and instantaneous downward shock scenarios

cannot be obtained. The downward interest rate shock in the preceding table was near zero.

As of December 31, 2015, all interest rate risk-related measures were within the board policy

limits, GFA requirements, and management guidelines.

Members’ Equity Northwest FCS has a capitalization objective to build and retain adequate members’ equity for its

continued financial viability and to provide for growth necessary to competitively meet the needs of

its customers. In assessing the amount of capital needed, Northwest FCS takes into account credit

risk, funding and interest rate risks, contingent and off-balance sheet liabilities and other

conditions warranting additional capital. As part of the capitalization plan Northwest FCS evaluates

the financial benefits and costs of using credit default swaps and other transactions. These

transactions protect Northwest FCS against credit losses and enhance its capital ratios. These

transactions amortize down and as such financial benefits diminish over time.

As displayed in the following table Northwest FCS exceeded the minimum regulatory requirements

(noted parenthetically):

Proposed Changes to the System’s Capitalization Regulations Under the Dodd-Frank Act, which was signed into law in 2010, the federal banking agencies, the

U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission and a

variety of other regulatory agencies are required to adopt a broad range of new rules and

regulations that will significantly reform the supervision and regulation of the financial services

industry. These federal agencies have been given significant discretion in drafting and

implementing rules and regulations, and consequently, much of the impact of the Dodd-Frank Act

may not be known for many more months or years. The Dodd-Frank Act largely preserves the

authority of the FCA as the System’s regulator by excluding System institutions from certain

provisions of the law.

Additionally, the Basel Committee on Banking Supervision (the Basel Committee) released

consultative proposals in 2009 aimed at strengthening global capital and liquidity regulations. The

Basel Committee adopted revised versions of the consultative proposals as definitive

frameworks in 2010, and made further revisions in 2011. This framework is often referred to as

“Basel III.” In 2013, the U.S. banking agencies approved final changes that substantially amended

their regulatory capital requirements to, among other things, implement Basel III in the United

States effective January 1, 2014, with mandatory compliance on January 1, 2015 for banks that

are not “advanced approach” banks.

On May 8, 2014, the FCA approved a proposed rule to modify the regulatory capital requirements

for the System. The stated objectives of the proposed rule are as follows:

• To modernize capital requirements while ensuring that institutions continue to hold

sufficient regulatory capital to fulfill their mission as government-sponsored enterprises;

• To ensure that the System’s capital requirements are comparable to the Basel III

framework and the standardized approach that the federal banking regulatory agencies

have adopted, but also to ensure that the rules recognize the cooperative structure and

the organization of the System;

• To make System regulatory capital requirements more transparent; and

• To meet certain requirements of the Dodd-Frank Act.

As currently drafted, the proposed rule would, among other things, eliminate the core surplus and

total surplus requirements and introduce common equity tier 1, tier 1 and total capital (tier 1 + tier

2) risk-based capital ratio requirements. The proposal would add a minimum tier 1 leverage ratio

for all System institutions, which would replace the existing net collateral ratio for System banks.

In addition, the proposal would establish a capital conservation buffer, modify and expand risk


weightings and, for System banks only, require additional public disclosures. The revisions to the

risk weightings of exposures would include alternatives to the use of credit ratings, as required by

the Dodd-Frank Act.

The initial public comment period for the proposed capital rule ended on February 16, 2015. The

FCA reopened the comment period from June 26, 2015 to July 10, 2015. While uncertainty exists

as to the final form of the proposed rule, based on our preliminary assessment, Northwest FCS

does not believe the new rule will impose any significant constraints on its business strategies or

growth prospects.

Management is not aware of any reasons why the regulatory capital requirements would not be

met in 2016. See Note 8 to the Consolidated Financial Statements for further discussion of these

regulatory ratios.


Phil DiPofi

President and CEO

March 7, 2016

Tom Nakano


Financial Officer

March 7, 2016

David B. Hedlin

Chair of the Board

March 7, 2016

39 NORTHWEST FCS

INDEPENDENT AUDITOR’S REPORT To the Board of Directors

of Northwest Farm Credit Services , ACA and Subsidiaries

We have audited the accompanying consolidated financial statements of Northwest Farm Credit

Services, ACA and its subsidiaries (the “Association”), which comprise the consolidated balance

sheets as of December 31, 2015, 2014 and 2013 and the related consolidated statements of

income, of comprehensive income, of changes in members’ equity, and of cash flows for the years

then ended.

Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial

statements in accordance with accounting principles generally accepted in the United States of

America; this includes the design, implementation, and maintenance of internal control relevant to

the preparation and fair presentation of consolidated financial statements that are free from

material misstatement, whether due to fraud or error.

Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our

audits. We conducted our audits in accordance with auditing standards generally accepted in the

United States of America. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the consolidated financial statements. The procedures selected depend on our

judgment, including the assessment of the risks of material misstatement of the consolidated

financial statements, whether due to fraud or error. In making those risk assessments, we

consider internal control relevant to the Association's preparation and fair presentation of the

consolidated financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

Association's internal control. Accordingly, we express no such opinion. An audit also includes

evaluating the appropriateness of accounting policies used and the reasonableness of significant

accounting estimates made by management, as well as evaluating the overall presentation of the

consolidated financial statements. We believe that the audit evidence we have obtained is

sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the financial position of Northwest Farm Credit Services, ACA and its subsidiaries at

December 31, 2015, 2014 and 2013, and the results of their operations and their cash flows for

the years then ended in accordance with accounting principles generally accepted in the United

States of America.

March 7, 2016

PricewaterhouseCoopers LLP, One Utah Center, 201 Main St., Salt Lake City, Utah 84111



CONSOLIDATED BALANCE SHEETS

41 NORTHWEST FCS


CONSOLIDATED STATEMENTS OF INCOME



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

43 NORTHWEST FCS


CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY



CONSOLIDATED STATEMENTS OF CASH FLOWS

45 NORTHWEST FCS


SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except as noted)

NOTE 1 – Organization and Operations

Organization

Northwest Farm Credit Services, ACA and its subsidiaries, Northwest Farm Credit Services, FLCA

(the Federal Land Credit Association (FLCA)) and Northwest Farm Credit Services, PCA (the

Production Credit Association (PCA)), (collectively referred to as Northwest FCS) is a member-

owned cooperative that provides credit and financially related services to or for the benefit of

eligible customers primarily in the states of Washington, Idaho, Oregon, Montana and Alaska.

Northwest FCS is a lending institution of the Farm Credit System (the System), a nationwide

system of cooperatively owned banks and associations, which was established by Acts of Congress

to meet the credit needs of American agriculture and rural America and is subject to the provisions

of the Farm Credit Act of 1971, as amended (the Farm Credit Act). The System is comprised of

three Farm Credit Banks (FCBs), one Agricultural Credit Bank (ACB) and 74 associations.

CoBank, ACB, and its wholly-owned subsidiaries (CoBank or Bank), its related associations, and

AgVantis Inc. (AgVantis) a technology service corporation, are collectively referred to as the

District. CoBank provides the funding to associations within the District and is responsible for

supervising certain activities of the District associations. The District consists of CoBank and 23

Agricultural Credit Associations (ACA), each having two wholly owned subsidiaries, (an FLCA and a

PCA), one FLCA and AgVantis.

ACA parent companies provide financing and related services through their FLCA and PCA

subsidiaries. The FLCA makes secured long-term agricultural real estate and rural home mortgage

loans. The PCA makes short- and intermediate-term loans for agricultural production or operating

purposes.

Northwest FCS, along with other System institutions, owns Farm Credit Financial Partners, Inc.

(FPI), a dedicated service corporation that provides information technology solutions for various

Farm Credit entities. At December 31, 2015, Northwest FCS owned 25 percent of FPI.

Northwest FCS is a partial owner in AgDirect, LLP (AgDirect), a trade credit financing program that

includes origination and re-financing of agricultural equipment loans through independent

equipment dealers. The program is facilitated by a limited liability partnership and at December 31,

2015, Northwest FCS owned approximately 13 percent of AgDirect.

Northwest FCS has joined an alliance with nine other Farm Credit partners that provide financing

for agribusiness companies under the trade name, ProPartners Financial (ProPartners). ProPartners

participates with crop input suppliers nationwide to create financing programs for their customers.

Upon joining ProPartners on September 1, 2012, Northwest FCS became a participant in 25.75

percent of the loan volume. Northwest FCS’ participant interest declined to 20 percent on October

1, 2015, and then to 10 percent on December 1, 2015. ProPartners is directed by representatives

from the participating associations. The income, expense and loss sharing agreements are based

on each association’s participation interest in ProPartners’ loan volume.

The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System

banks and associations. The FCA examines the activities of System institutions to ensure their

compliance with the Farm Credit Act, FCA regulations and safe and sound banking practices.

The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance

Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). By law, the

Insurance Fund is required to be used: (1) to ensure the timely payment of principal and interest

on System-wide debt obligations (Insured Debt), (2) to ensure the retirement of protected stock at

par or stated value and (3) for other specified purposes. The Insurance Fund is also available for

discretionary use by the Insurance Corporation in providing assistance to certain troubled System

institutions and to cover the operating expenses of the Insurance Corporation. Each System bank

is required to pay premiums, which may be passed on as an expense to the associations, into the

Insurance Fund based on its annual average outstanding insured debt adjusted to reflect the

reduced risk on loans or investments guaranteed by federal or state governments until the assets

in the Insurance Fund reach the “secure base amount” defined in the Farm Credit Act as 2 percent

of the aggregate Insured Debt or such other percentage of the aggregate obligations as the

Insurance Corporation, in its sole discretion, determines to be actuarially sound. When the amount

in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to

47 NORTHWEST FCS

reduce premiums, as necessary to maintain the Insurance Fund at the 2 percent level. As required

by the Farm Credit Act, as amended, the Insurance Corporation may return excess funds above

the secure base amount to System institutions. CoBank passes this premium expense and the

return of excess funds as applicable, through to each association based on the association’s

average adjusted note payable balance with CoBank.

Operations

The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow,

and financial services that Northwest FCS can offer. Northwest FCS is authorized to provide, either

directly or in participation with other lenders, credit, commitments to extend credit and related

services to eligible customers. Eligible customers include American farmers, ranchers, producers or

harvesters of aquatic products, rural residents and farm-related businesses.

Northwest FCS also serves as an intermediary in offering credit life insurance, federal multi-peril

crop insurance programs, including the Whole-Farm Revenue Protection (WFRP) program, named

peril/crop hail insurance, advance conditional payment accounts and provides additional services to

customers such as fee appraisals and business management services.

Northwest FCS’ financial condition and results of operations may be impacted by factors that affect

CoBank. The CoBank Annual Report is available free of charge on CoBank’s website,

www.cobank.com; or may be obtained at no charge by contacting Northwest FCS, P.O. Box 2515,

Spokane, Washington 99220-2515, or by telephone at (509) 340-5300, toll free (800) 743-2125,

as well as upon request at any Northwest FCS office location. Upon request, stockholders of

Northwest FCS will be provided with a copy of the CoBank Annual Report, which discusses the

material aspects of its financial condition, changes in financial condition and results of operations.

NOTE 2 – Summary of Significant Accounting Policies The accounting and reporting policies of Northwest FCS conform to accounting principles generally

accepted in the United States of America (GAAP) and prevailing practices within the financial

services industry. The preparation of financial statements in conformity with GAAP requires

management to make estimates and assumptions that affect the amounts reported in the

consolidated financial statements and accompanying notes. Actual results may differ from these

estimates. Significant estimates are discussed in the footnotes, as applicable.

Certain amounts in prior years’ consolidated financial statements have been reclassified to conform

to the current year’s financial statements presentation. The reclassifications are within the

noninterest expense categories on the Consolidated Statements of Income and did not impact the

results of operations or changes in members’ equity. The reclassifications include separate

presentation for purchased services, which consists mainly of technology costs, deferred loan

origination costs presented within salaries and benefits, and other costs combined within other

noninterest expense.

The consolidated financial statements include the accounts of Northwest Farm Credit Services,

ACA, Northwest Farm Credit Services, FLCA, and Northwest Farm Credit Services, PCA. All inter-

company transactions have been eliminated in the consolidation.

Recently Issued or Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (FASB) issued guidance, Leases. This

guidance is intended to improve financial reporting about leasing transactions and affects all

organizations that lease assets. The guidance will require organizations that lease assets, referred

to as lessees, to recognize on the balance sheet the assets and liabilities for the rights and

obligations created by those leases. The accounting for organizations that own the assets leased

by the lessee, also known as lessor accounting, will remain largely unchanged from current GAAP.

The guidance becomes effective for the interim and annual reporting periods beginning after

December 15, 2018. Northwest FCS is reviewing the guidance to determine the effect on its

financial condition and results of operations.

In January 2016, the FASB issued guidance, Financial Instruments – Overall: Recognition and

Measurement of Financial Assets and Financial Liabilities. The guidance primarily affects the

accounting for equity investments, financial liabilities under the fair value option, and the

presentation and disclosure requirements for financial instruments. No significant changes were

made to the recognition and measurement guidance for investments in loans and debt securities.

This guidance becomes effective for interim and annual reporting periods beginning after

December 15, 2017. Northwest FCS’ is currently evaluating the impact of the guidance on its

financial condition and results of operations.

In May 2015, the FASB issued guidance, Disclosures of Investments in Certain Entities the

Calculate Net Asset Value per Share (or Its Equivalent). The guidance removes the requirements to

categorize assets valued using net asset value per share within the fair value hierarchy (Levels 1 -


3) as well as certain other disclosures. The guidance becomes effective for interim and annual

reporting periods beginning after December 15, 2015. Early adoption is permitted and

retrospective application is required upon adoption. Northwest FCS is currently evaluating the

impact of the guidance on its financial statement disclosures.

In April 2015, the FASB issued guidance, Interest — Imputation of Interest. The guidance requires

debt issuance costs be presented in the balance sheet as a direct deduction from the carrying

value of the debt liability. Prior to the issuance of the standard, debt issuance costs were required

to be presented in the balance sheet as a deferred charge (asset). This guidance becomes

effective for interim and annual reporting periods beginning after December 15, 2015, and early

application is permitted. The adoption of this guidance is not expected to impact Northwest FCS’

financial condition or its results of operations.

In August 2014, the FASB issued guidance, Presentation of Financial Statements — Going Concern.

The guidance governs management’s responsibility to evaluate whether there is substantial doubt

about an entity’s ability to continue as a going concern and to provide related footnote disclosures.

This guidance requires management to perform interim and annual assessments of an entity’s

ability to continue as a going concern within one year after the date the financial statements are

issued or within one year after the financial statements are available to be issued, when applicable.

Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the

assessed period. This guidance becomes effective for interim and annual periods ending after

December 15, 2016, and early application is permitted. Northwest FCS will be required to make its

initial assessment as of December 31, 2016. The adoption of this guidance is not expected to

impact Northwest FCS’ financial condition or its results of operations, but may impact its

disclosures.

In May 2014, the FASB issued guidance, Revenue from Contracts with Customers. The guidance

governs revenue recognition from contracts with customers and requires an entity to recognize

revenue to depict the transfer of promised goods or services to customers in an amount that

reflects the consideration to which the entity expects to be entitled in exchange for those goods or

services. Financial instruments and other contractual rights within the scope of other guidance

issued by the FASB are excluded from the scope of this new revenue recognition guidance. In this

regard, a majority of Northwest FCS’ contracts would be excluded from the scope of this new

guidance. In August 2015, the FASB issued an update that defers this guidance by one year, which

results in the new revenue standard becoming effective for interim and annual reporting periods

beginning after December 15, 2017. Northwest FCS is in the process of reviewing contracts to

determine the effect, if any, on its financial condition or results of operations.

Significant Accounting Policies

Cash

Cash, as included in the Consolidated Statements of Cash Flows, represents cash on hand and on

deposit at financial institutions.

Investment Securities

Northwest FCS may hold investments in accordance with mission-related investment and other

investment programs approved by the FCA. These programs allow Northwest FCS to make

investments that further the System’s mission to serve rural America. Mission-related investments

for which Northwest FCS has the intent and ability to hold to maturity are classified as held-to-

maturity and carried at cost, adjusted for the amortization of premiums and accretion of discounts.

Loans and Allowance for Credit Losses

Long-term real estate mortgage loans may have original maturities ranging up to 40 years,

although the typical loan is 25 years or less. Short- and intermediate-term loans for agricultural

production or operating purposes generally have maturities of 10 years or less. Loans are carried

at their principal amount outstanding adjusted for charge-offs, deferred loan fees or costs, and

purchase premiums or discounts. Interest on loans is accrued and credited to interest income

based upon the daily principal amount outstanding. Loan origination fees and direct loan

origination costs are capitalized, and the net fee or cost is amortized over the estimated life of the

related loan as an adjustment to yield. These deferred origination costs are periodically evaluated.

Unamortized net loan origination fees included as an offset to loans on the Consolidated Balance

Sheets were $20,357, $20,127 and $20,403 as of December 31, 2015, 2014, and 2013,

respectively.

Northwest FCS purchases loan and lease participations from other entities to replace earnings and

diversify risk related to existing commodities financed and the geographic areas served. In

addition, Northwest FCS sells a portion of certain large loans to other entities to reduce risk and

comply with established lending limits. Loans are sold following accounting requirements for sale

treatment.

49 NORTHWEST FCS

Impaired loans are loans for which it is probable that not all principal and interest will be collected

according to the contractual terms of the loan and are generally considered substandard or

doubtful, which is in accordance with the loan rating model, as described below. Impaired loans

include nonaccrual loans, restructured loans, and loans past due 90 days or more and still accruing

interest. A loan is considered contractually past due when any principal repayment or interest

payment required by the loan instrument is not received on or before the due date. A loan shall

remain contractually past due until it is formally restructured or until the entire amount past due,

including principal, accrued interest, and penalty interest incurred as the result of past due status,

is collected or otherwise discharged in full.

Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent

for 90 days or more (unless adequately secured and in the process of collection) or circumstances

indicate that collection of principal and/or interest is in doubt. When a loan is placed in nonaccrual

status, accrued interest deemed uncollectible is reversed (if accrued in the current year) and/or

charged against the allowance for loan losses (if accrued in the prior year). Loans are charged off

at the time they are determined to be uncollectible.

A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons

related to the debtor’s financial difficulties, Northwest FCS grants a concession to the debtor that it

would not otherwise consider to be a market transaction. Such concessions may include monetary

concessions or other modifications to the contractual terms of the loan. If the borrower’s ability to

meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.

When loans are in nonaccrual status, loan payments are generally applied against the recorded

nonaccrual balance. A nonaccrual loan may, at times, be maintained on a cash basis. As a cash

basis nonaccrual loan, the recognition of interest income from cash payments received is allowed

when the collectability of the recorded investment in the loan is no longer in doubt and the loan

does not have a remaining unrecovered charge-off associated with it. Nonaccrual loans may be

returned to accrual status when all contractual principal and interest are current, the borrower has

demonstrated payment performance, there are no unrecovered prior charge-offs, and collection of

future payments is no longer in doubt. If previously unrecognized interest income exists at the

time the loan is transferred to accrual status, cash received at the time of, or subsequent to, the

transfer is first recorded as interest income until such time as the recorded balance equals the

contractual indebtedness of the borrower.

Northwest FCS uses a two-dimensional loan rating model that incorporates a 14-point scale to

identify and track the probability of borrower default and a separate scale addressing loss given

default over a period of time. Probability of default is the probability that a borrower will

experience a default within 12 months from the date of the determination of the risk rating. A

default is considered to have occurred if the borrower is past due more than 90 days or the lender

considers that the borrower will not be able to pay its obligation in full due to credit deterioration

issues such as nonaccrual status, loan charge-offs, distressed loan restructuring or bankruptcy.

The loss given default is management’s estimate as to the anticipated principal loss on a specific

loan assuming the loan goes into default.

Each of the probability of default categories carries a distinct likelihood of default. The 14-point

scale provides for granularity of the probability of default, especially in the acceptable ratings.

There are nine acceptable categories that range from a loan of the highest quality to a loan of

minimally acceptable quality. The probability of default between 1 and 9 is very narrow and would

reflect almost no default to a minimal default percentage. The probability of default grows more

rapidly as a loan moves from a “9” to other assets especially mentioned (category 10) and grows

significantly as a loan moves to a substandard level (category 11). A substandard rating indicates

that the probability of default is high.

The credit risk rating methodology is a key component of Northwest FCS’ allowance for loan losses

evaluation, and is generally incorporated into its loan underwriting standards, pricing, and internal

lending limits. The allowance is increased through provisions for loan losses and loan recoveries

and is decreased through reversals of provisions for loan losses and loan charge-offs. The

allowance for loan losses is maintained at a level considered adequate by management to provide

for probable and estimable losses inherent in the loan portfolio. The allowance for loan losses

encompasses various judgments, evaluations and appraisals with respect to the loans and their

underlying security that, by their nature, contain elements of uncertainty, imprecision and

variability. Changes in the agricultural economy and environment, and their impact on borrower

repayment capacity, will cause various judgments, evaluations and appraisals to change over time.

Accordingly, actual circumstances could vary significantly from Northwest FCS’ expectations and

estimates. In determining and supporting the level of allowance for loan losses, management

considers factors such as: the loan portfolio composition and concentrations, collateral values,

commodity prices, import/export levels, government assistance programs, regional and global

economic effects and weather-related influences.


The allowance for loan losses includes components for loans individually evaluated for impairment

and loans collectively evaluated for impairment. Generally, loans individually evaluated in the

allowance for loan losses represent the difference between the recorded investment in the loan

and the present value of the cash flows expected to be collected, discounted at the loan’s effective

interest rate, or at the fair value of the collateral, if the loan is collateral dependent. For those

loans collectively evaluated for impairment, the allowance for loan losses is determined using an

estimate of expected losses based on historical experience for similar loans.

The reserve for unfunded lending commitments is based on management’s best estimate of losses

inherent in lending commitments made to customers but not yet disbursed. Factors such as

likelihood of disbursal and likelihood of losses given disbursement are utilized in determining this

contingency. The reserve for unfunded lending commitments is increased through provisions for

unfunded lending commitments and is decreased through reversals of provisions for unfunded

lending commitments.

Investment in CoBank, ACB

Northwest FCS' required investment in CoBank is in the form of Class A stock with a par value of

$100 per share. The minimum required investment is 4 percent of Northwest FCS’ prior year’s

average direct loan volume. In addition, Northwest FCS is required to capitalize its patronage-

based participation loans sold to CoBank at 8 percent of Northwest FCS’ prior ten-year average

balance of such participations sold to CoBank. The investment in CoBank is comprised of

purchased stock and stock received as patronage. Accounting for this investment is on the cost

plus allocated equities basis. Northwest FCS owned approximately 12 percent of the outstanding

common stock of CoBank at December 31, 2015.

Other Property Owned

Other property owned, consisting of real and personal property acquired through foreclosure or

deed in lieu of foreclosure, is recorded at fair value less estimated selling costs. Any initial

reduction in the carrying amount of a loan to the fair value of the collateral received is charged to

the allowance for loan losses. On at least an annual basis, revised estimates to the fair value are

reported as adjustments to the carrying amount of the asset, provided that such adjusted value is

not in excess of the carrying amount at acquisition. Income and expenses from operations, losses

on sales and carrying value adjustments are included in other noninterest expenses on the

Consolidated Statements of Income. Gains on sales are included in other noninterest income on

the Consolidated Statements of Income.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost.

Depreciation is provided on the straight-line method over the estimated useful lives of the assets.

Estimated useful lives are as follows: Buildings are 40 years, leasehold improvements are the

lesser of the remaining lease term or 10 years and furniture and equipment are 1 to 7 years. Land

is not depreciated. Gains and losses on dispositions are reflected in other noninterest expenses on

the Consolidated Statements of Income. Maintenance and repairs are charged to occupancy and

equipment expense and significant improvements are capitalized. Leased property meeting certain

criteria is capitalized and depreciated using the straight-line method over the terms of the

respective leases.

Advanced Conditional Payments

Northwest FCS is authorized under the Farm Credit Act to accept advance payments from

borrowers, which are classified within advance conditional payments and other interest-bearing

liabilities on the Consolidated Balance Sheets. Advanced conditional payments are not insured.

Interest is paid by Northwest FCS on such accounts.

Employee Benefit P lans

Substantially all employees of Northwest FCS participate in the Farm Credit Foundations Defined

Contribution/401(k) Retirement Plan (Defined Contribution Plan) or the Defined Benefit Pension

Plan (Pension Plan). Enrollment in the Pension Plan was curtailed in 1994. Existing employees who

elected to transfer out of the Pension Plan and all new employees hired after December 31, 1994,

participate in the Defined Contribution Plan. The Pension Plan uses the Entry Age Normal Cost

actuarial method for funding purposes and the Projected Unit Credit actuarial method for financial

reporting purposes.

The Defined Contribution Plan has two components. In this plan, Northwest FCS provides a

monthly contribution based on a defined percentage of the employee’s salary. Employees may also

defer a portion of their salaries in accordance with Section 401(k) of the Internal Revenue Code

(IRC) to which Northwest FCS matches a certain percentage of employee contributions. Defined

contribution costs are expensed in the same period that participants earn employer contributions

and employer matching costs are expensed as funded.

Certain management or highly compensated employees who participate in the Pension Plan also

participate in a nonqualified Northwest FCS Defined Benefit Restoration Plan (Restoration Plan).

Each eligible employee whose retirement benefit under the Pension Plan is limited by IRC Sections

51 NORTHWEST FCS

401(a) (17), 415, or any Code provision or government regulations subsequently issued, will

receive a benefit if these programs are continued. Under the present plan, the monthly benefit is

equal to the difference between the participant’s actual monthly retirement benefit payment under

the Pension Plan and the monthly retirement benefit payment that would be payable to the

participant under the Pension Plan if the limitations of IRC Sections 401(a) (17), 415, or any code

provision or government regulations subsequently issued, did not apply.

Income Taxes

As previously described, Northwest Farm Credit Services, ACA conducts its business activities

through two wholly owned subsidiaries. Long-term mortgage lending activities are operated

through a wholly owned FLCA subsidiary which is exempt from federal and state income tax.

Short- and intermediate-term lending activities are operated through a wholly owned PCA

subsidiary. Noninterest expenses are allocated to each subsidiary based on estimated relative

service. Transactions between the subsidiaries and the parent company have been eliminated upon

consolidation. The ACA, along with the PCA subsidiary, is subject to federal income taxes and state

income taxes in Idaho, Oregon and Montana. Both entities currently operate as cooperatives that

qualify for tax treatment under Subchapter T of the IRC. Accordingly, under specified conditions,

they can exclude from taxable income amounts distributed as qualified patronage refunds in the

form of cash, stock, or allocated surplus. Provisions for income taxes are made only on those

earnings that will not be distributed as qualified patronage refunds.

Northwest FCS accounts for income taxes under the liability method. Accordingly, deferred taxes

are recognized for estimated taxes ultimately payable or recoverable based on federal and state

taxes. Deferred taxes are recorded on the tax effect of all temporary differences based on the

assumption that such temporary differences are retained by Northwest FCS and will therefore

impact future tax payments. A valuation allowance is provided against deferred tax assets to the

extent that it is more likely than not (over 50 percent probability), based on management’s

estimate, that they will not be realized. The consideration of valuation allowances involves various

estimates and assumptions as to future taxable earnings, including the effects of Northwest FCS’

expected qualified patronage refunds that reduce taxable earnings.

Deferred income taxes have not been provided by Northwest FCS on stock patronage distributions

received from the Bank prior to January 1, 1993, the adoption date of the FASB guidance on

income taxes. Management’s intent is to permanently invest these and other undistributed

earnings in the Bank, or if converted to cash, to pass through any distribution related to pre-1993

earnings to Northwest FCS’ stockholders through qualified patronage allocations. Northwest FCS

has not provided deferred income taxes on amounts allocated to Northwest FCS which relate to

the Bank’s post-1992 earnings to the extent that such earnings will be passed through to

Northwest FCS’ stockholders through qualified patronage allocations. Additionally, deferred income

taxes have not been provided on the Bank’s post-1992 unallocated earnings. The Bank currently

has no plans to distribute unallocated Bank earnings and does not contemplate circumstances that,

if distributions were made, would result in taxes being paid by Northwest FCS.

Patronage Distributions from CoBank, ACB

Northwest FCS records patronage distributions from CoBank on an accrual basis. Under the current

CoBank capital plan, they distribute patronage from Northwest FCS’ direct lending business in

cash. For patronage applicable to participations sold to CoBank, patronage is distributed in 75

percent cash and 25 percent CoBank Class A stock. Accrued patronage is included in other assets

on the Consolidated Balance Sheets.

Derivative Instruments and Hedging Activity

In the normal course of business, Northwest FCS enters into derivative financial instruments that

are principally used to manage interest rate and foreign currency exchange rate risk on assets.

Derivatives are recorded on the Consolidated Balance Sheets as other assets and other liabilities at

fair value.

Changes in the fair value of derivatives are recorded in current period earnings or accumulated

other comprehensive income (loss), depending on the use of the derivative and whether it qualifies

for hedge accounting. For fair-value hedge transactions that hedge changes in the fair value of

assets, liabilities, or firm commitments, changes in the fair value of the derivative are recorded in

earnings and will generally be offset by changes in the hedged item’s fair value. For cash-flow

hedge transactions, in which Northwest FCS is hedging the variability of future cash flows related

to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the

derivative will generally be deferred and reported in accumulated other comprehensive income

(loss). The gains and losses on the derivative that are deferred and reported in accumulated other

comprehensive income (loss) will be reclassified as earnings in the periods in which earnings are

impacted by the variability of the cash flows of the hedged item. The ineffective portion of all

hedges is recorded in current period earnings. For derivatives not designated as a hedging

instrument, the related change in fair value is recorded in current period earnings.

Northwest FCS formally documents all relationships between hedging instruments and hedged

items, as well as its risk management objectives and strategies for undertaking hedge transactions.


This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to

(1) specific assets or liabilities on the Consolidated Balance Sheets, or (2) firm commitments or

forecasted transactions. Northwest FCS also formally assesses (at the hedge’s inception and on an

ongoing basis) whether the derivatives that are used in hedging transactions have been highly

effective in offsetting changes in the fair value or cash flows of hedged items and whether those

derivatives may be expected to remain highly effective in future periods. Due to the structure of

Northwest FCS’ current derivative transactions, management has no reason to believe that hedge

accounting qualifications will not be met and believes the transactions will continue to be recorded

in the manner described in Note 15 of these Consolidated Financial Statements.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) is a measure of all changes in the equity of Northwest FCS as

a result of recognized transactions and other economic events of the period other than capital

transactions with the stockholders. Other comprehensive income (loss) refers to revenue,

expenses, gains and losses that under GAAP are recorded as an element of members’ equity and

comprehensive income but are excluded from net income. Accumulated other comprehensive

income (loss) refers to the balance of these transactions. Other comprehensive income (loss) is

comprised of adjustments related to Northwest FCS’ Pension Plan and Restoration Plan as well as

adjustments related to its derivative contracts used to manage interest rate and foreign currency

exchange rate risk on assets.

Fair Value Measurements

Accounting guidance defines fair value, establishes a framework for measuring fair value, and

expands disclosures about fair value measurements. It describes three levels of inputs that may be

used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity

has the ability to access at the measurement date. Level 1 assets include assets held in trust

funds, which relate to amounts in a deferred compensation and a supplemental retirement plan.

The trust funds include investments that are actively traded and have quoted net asset values that

are observable in the marketplace.

Level 2 – Observable inputs other than quoted prices included within Level 1 that are observable

for the asset or liability either directly or indirectly. Level 2 inputs include the following: (1) quoted

prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar

assets or liabilities in markets that are not active so that they are traded less frequently than

exchange-traded instruments, the prices are not current or principal market information is not

released publicly; (3) inputs other than quoted prices that are observable such as interest rates

and yield curves, prepayment speeds, credit risks and default rates and (4) inputs derived

principally from or corroborated by observable market data by correlation or other means. Pension

Plan assets that are derived from observable inputs are reported in Level 2. This category includes

derivative contracts. Level 3 – Unobservable inputs are those that are supported by little or no market activity and that

are significant to the fair value of the assets or liabilities. These unobservable inputs reflect the

reporting entity’s own assumptions about factors that market participants would use in pricing the

asset or liability. Level 3 assets and liabilities include financial instruments whose value is

determined using pricing models, discounted cash flow methodologies, or similar techniques, as

well as instruments for which the determination of fair value requires significant management

judgment or estimation. This category generally includes nonaccrual loans, investments in system

entities, other property owned, notes payable and standby letters of credit. Pension Plan assets

that are supported by little or no market data in determining the fair value are included in Level 3.

The fair value disclosures are presented in Note 10 and Note 13.

Off-Balance Sheet Credit Exposures

Commitments to extend credit are agreements to lend to customers. The commitments generally

have fixed expiration dates or other termination clauses that may require payment of a fee.

Commercial letters of credit are conditional commitments issued to facilitate commerce and

typically result in the commitment being funded when the underlying transaction is consummated

between the customer and a third party. Standby letters of credit are irrevocable agreements to

guarantee payments of specified obligations. The credit risk associated with commitments to

extend credit is essentially the same as that involved with extending loans to customers and is

subject to normal credit policies. Collateral may be obtained based on management’s assessment

of the customer’s creditworthiness.

53 NORTHWEST FCS

NOTE 3 – Loans and Allowance for Credit Losses Northwest FCS’ loan portfolio is comprised of a wide array of commodities and product offerings.

Northwest FCS has specialized staff and has tailored financial products to effectively serve these

diversified markets. A summary of loans follows:

Northwest FCS may purchase or sell loan participation interests with other parties to diversify risk,

manage loan volume and comply with FCA regulations. The following tables present information

regarding participations purchased and sold. Participations purchased volume in the table excludes

syndications and purchases of other interests in loans:

Northwest FCS' concentration of credit risk in various agricultural commodities and industries is

shown in the following table:

While the amounts and percentages shown above represent Northwest FCS' maximum potential

credit risk as it relates to recorded loan principal, a substantial portion of Northwest FCS' lending

activities is collateralized and exposure to credit loss associated with lending activities is reduced

accordingly. An estimate of the current loss exposure is considered in the determination of the

allowance for loan losses in the Consolidated Financial Statements.


The amount of collateral obtained, if deemed necessary upon extension of credit, is based on

management’s credit evaluation of the borrower. Collateral held varies but typically includes

farmland and income-producing property, such as crops and livestock, machinery and equipment

as well as inventories and receivables. Long-term real estate loans are secured by first liens on the

underlying real property. Federal regulations state that long-term real estate loans are not to

exceed 85 percent (97 percent if guaranteed by a government agency) of the property’s appraised

value. However, a decline in a property’s market value subsequent to loan origination or advances,

or other actions necessary to protect the financial interest of Northwest FCS in the collateral, may

result in loan-to-value ratios in excess of the regulatory maximum.

One credit quality indicator utilized by Northwest FCS is the FCA Uniform Loan Classification

System that categorizes loans into five categories. The categories are defined as follows: • Acceptable – Assets are expected to be fully collectible and represent the highest quality.

• Other assets especially mentioned (OAEM) – Assets are currently collectible but exhibit some

potential weakness.

• Substandard – Assets exhibit some serious weakness in repayment capacity, equity, and/or

collateral pledged on the loan.

• Doubtful – Assets exhibit similar weaknesses to substandard assets; however, doubtful assets

have additional weaknesses in existing factors, conditions and values that make collection in

full highly questionable.

• Loss – Assets are considered uncollectible.

The following tables show loans and related accrued interest classified under the FCA Uniform

Loan Classification System as a percentage of total loans and related accrued interest by loan type:

55 NORTHWEST FCS

Impaired loans are loans for which it is probable that all principal and interest will not be collected

according to the contractual terms. The following table presents information related to impaired

loans, including accrued interest, where applicable:

Commitments to lend additional funds to borrowers whose loans were classified as impaired at

December 31, 2015, 2014 and 2013, totaled $121, $1,076 and $6,648, respectively.

Nonperforming assets consist of impaired loans and other property owned. The following table

presents these nonperforming assets in a more detailed manner than the previous table. The

nonperforming assets, including related accrued interest where applicable, are as follows:


Additional impaired loan information, including related accrued interest where applicable, is as follows:

57 NORTHWEST FCS

Interest income was recognized, and cash payments were applied on impaired nonaccrual loans as

described in Note 2. The following table presents interest income recognized on impaired loans:

Interest income on nonaccrual and accruing restructured loans that would have been recognized

under the original terms of the loans follows:

The variance between the interest income recognized in the current period and interest income

that would have been recognized under the original terms for the year ended December 31, 2015,

2014 and 2013, was the result of the recognition of interest income contractually due in prior

periods that was deferred as described in Note 2.

The following tables provide an aging analysis of past due loans and accrued interest:


Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges or acquisition costs and may also reflect a previous direct write-down of the investment.

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the creditor, for

economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the

debtor that it would not otherwise consider a market transaction. Concessions vary, are borrower

specific and may include any of the following: interest rate reductions, term extensions or

adjustments or loan reamortization. In rare cases, principal obligations may be reduced.

The following table presents additional information regarding TDRs:

Note: Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges or acquisition costs and may also reflect a previous direct write-down of the investment.

During 2015, TDRs that occurred within the previous 12 months and for which there was a

subsequent payment default during the period totaled $95, of which $53 was classified as

production and intermediate term, and $42 was classified as real estate mortgage loans. During

2014, TDRs that occurred within the previous 12 months and for which there was a subsequent

payment default during the period totaled $238, which was classified as production and

intermediate term loans. During 2013, TDRs that occurred within the previous 12 months and for

which there was a subsequent payment default during the period totaled $4,033, of which $3,482

was classified as real estate mortgage and $551 was classified as rural residential real estate loans.

Additional commitments to lend to borrowers whose loans have been modified as TDRs was $121

at December 31, 2015.

The following table provides information on outstanding TDRs. These loans are included as

impaired loans in the impaired loans table.

Northwest FCS possessed foreclosed rural residential real estate of $836 as of December 31, 2015,

which was included in other property owned on the Consolidated Balance Sheets. The recorded

investment in loans collateralized by rural residential real estate that was in the process of

foreclosure as of December 31, 2015, was $1,905.

59 NORTHWEST FCS

Summaries of the changes in the allowance for loan losses and the ending balance of loans and accrued interest outstanding are as follows:


A summary of the changes in the reserve for unfunded lending commitments follows:

Credit Default Swaps

During 2007 and 2004, Northwest FCS entered into credit default swaps with Mt. Spokane 2007-A

LLC (2007 LLC) and Mt. Spokane 2004-A LLC (2004 LLC), respectively, for credit and capital

enhancement purposes. Each of the agreements could remain in place over the life of the loans

under the swap agreement; however, Northwest FCS has the right to redeem any of the

agreements once the outstanding balance is below 10 percent of the original balance or if there

are significant changes affecting the capital benefits. Fees are paid accordingly based on the

volume of the loans under the agreements. The following discussion provides the key provisions of

each of the agreements.

2007 LLC

Pursuant to the credit default swap, following the occurrence of a known loss, the 2007 LLC will be

required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan

plus covered interest and costs less any recoveries. No payment is due to Northwest FCS until

Northwest FCS’ Retained First Loss Notional Amount is reduced to zero. In addition to loss events,

proportionate reductions in the Retained First Loss Notional Amount will occur due to reductions of

the Aggregate Notional Amount of the Reference obligations associated with non-loss events such

as repayment of loan principal. As of December 31, 2015, the balance of the Retained First Loss

Notional Amount was $1,436. The maximum amount of losses the 2007 LLC will be required to pay

under the credit default swap was $9,329 and losses incurred by Northwest FCS have been $233.

2004 LLC

Pursuant to the credit default swap, following the occurrence of a known loss, the 2004 LLC will be

required to pay an amount to Northwest FCS equal to the principal amount of the defaulted loan

plus covered interest and costs less any recoveries. As of December 31, 2015, the maximum

amount of losses the 2004 LLC will be required to pay under the credit default swap was $5,548

and losses incurred by the 2004 LLC have been $259. On December 1, 2015, Northwest FCS

provided notice it would exercise its right to redeem the 2004 LLC transaction on January 15, 2016

as the outstanding balance was below 10 percent of the original balance. The impacts of

61 NORTHWEST FCS

unwinding this transaction to Northwest FCS’ financial condition, result of operations, capital ratios

and credit quality will be minimal.

The following tables provide information related to loan balances, fees and amortization pertaining

to the aforementioned credit default swap agreements:

2007 LLC is also a variable interest entity created by Lehman Brothers to acquire eligible securities

that will be used as collateral to secure the Failure to Pay Credit Event payment of the 2007 LLC

under a credit default swap with Northwest FCS. The bankruptcy of Lehman Brothers in 2008 did

not have an economic impact on the 2007 LLC. The securities are limited to direct obligations of,

and obligations fully guaranteed as to timely payment of principal and interest by, the United

States of America or obligations of any agency or instrumentality of the United States of America,

the obligations of which are backed by the full faith and credit of the United States of America.

2004 LLC is a variable interest entity created by Bank of America to acquire eligible securities that

will be used as collateral to secure the Failure to Pay Credit Event payment of the 2004 LLC under

a credit default swap with Northwest FCS. The securities are held in the form of direct obligations

of, and obligations fully guaranteed as to timely payment of principal and interest by, the United

States of America. Included are obligations of the Federal National Mortgage Association, Federal

Home Loan Mortgage Corporation, Federal Home Loan Bank or obligations of any agency or

instrumentality of the United States of America, the obligations of which are backed by the full

faith and credit of the United States of America.

Eligible securities, however, will not include “real estate mortgages” (or interest therein) as defined

in Section 7701(i) of the IRC and the accompanying United States Treasury Regulations.

Management has evaluated these variable interest entities and concluded that they are not subject

to consolidation.

NOTE 4 – Investment in CoBank, ACB Northwest FCS is required to own stock in CoBank to capitalize its direct loan balance and

participation loans sold to CoBank. Under the current CoBank capital plan applicable to such

participations sold, patronage from CoBank related to these participations sold is paid 75 percent

cash and 25 percent CoBank Class A stock. The capital plan is evaluated annually by CoBank’s

board and management and is subject to change.

Northwest FCS owned approximately 12 percent of the issued stock of CoBank at December 31,

2015. As of that date, CoBank's assets totaled $117,394,526 and members' equity totaled

$7,810,469. CoBank's earnings were $936,673 during 2015.

CoBank may require the holders of its equities to subscribe for such additional capital as may be

needed to meet its capital requirements for its joint and several liability under the Farm Credit Act

and regulations. In making such a capital call, CoBank shall take into account the financial

condition of each such holder and such other considerations, as it deems appropriate.

NOTE 5 – Premises and Equipment Premises and equipment consist of the following:

In 2014, Northwest FCS purchased land and a building to use as its headquarters for $9,010 and

expects to move into the facility during the second half of 2016 after remodeling is complete.


Northwest FCS is obligated under various operating leases for certain office space and equipment.

Rental expense under these operating leases was $7,127, $7,101 and $6,687 for the years ended

December 31, 2015, 2014 and 2013, respectively, and was included in occupancy and equipment

expense on the Consolidated Statements of Income.

At December 31, 2015, future minimum lease payments for leases were as follows:

The capital lease payments in the above table include $441 of interest; the total present value of

minimum capital lease payments at December 31, 2015, was $1,334. The capitalized value of

buildings under capital leases was $1,911 as of December 2015, 2014 and 2013, and accumulated

depreciation was $791, $601 and $411, respectively, as of December 2015, 2014 and 2013.

NOTE 6 – Other Property Owned Net (gains) losses on other property owned consist of the following:

The Farm Credit Act requires that mineral rights acquired after 1985 through foreclosure be sold to

the buyer of the surface rights in the land. Northwest FCS retains certain mineral interests in land

acquired through foreclosure and sale proceedings prior to this requirement and in accordance

with the Farm Credit Act, for which it receives income from leases and royalties. These intangible

assets have no recorded value on the Consolidated Balance Sheets. Income earned on these

mineral rights for the years ended December 31, 2015, 2014 and 2013, was $5,622, $8,691 and

$7,765, respectively, and was included in other noninterest income on the Consolidated

Statements of Income.

NOTE 7 – Note Payable to CoBank, ACB Northwest FCS’ indebtedness to CoBank represents borrowings by Northwest FCS to fund its loan

portfolio. This indebtedness is collateralized by a pledge of substantially all of Northwest FCS’

assets and is governed by a General Financing Agreement (GFA). The GFA and other term

structures available to Northwest FCS from CoBank are subject to periodic renewals in the normal

course of business. Each debt obligation has its own term and rate structure. Northwest FCS was

in compliance with the terms and conditions of the GFA as of December 31, 2015. The weighted

average interest rate for all debt was 1.52, 1.44 and 1.59 percent at December 31, 2015, 2014

and 2013, respectively. The GFA will expire on May 31, 2018 and management expects renewal of

the GFA at that time.

Through the note payable to CoBank, Northwest FCS was liable for the following:

Fixed rate debt typically has original maturities ranging from one to 30 years and at December 31,

2015, included callable debt of $861,000, with a range of call dates between January 2016 and

November 2018. Floating rate notes generally have maturities ranging from one month to five

years. Discount notes have maturities from one day to 365 days. The daily revolving line of credit

is renewed annually and is priced at the overnight funds rate.

63 NORTHWEST FCS

The maturities of debt within the note payable to CoBank as of December 31, 2015, are shown

below:

Under the Farm Credit Act, Northwest FCS is obligated to borrow only from CoBank, unless CoBank

gives approval to borrow elsewhere. CoBank, consistent with FCA regulations, has established

limitations on Northwest FCS’ ability to borrow funds based on specified factors or formulas

relating primarily to credit quality and financial condition. At December 31, 2015, Northwest FCS’

note payable is within the specified limitations.

Northwest FCS has a secondary source of liquidity and funding through an uncommitted Federal

Funds line of credit with Wells Fargo. The amount available through this line is $75,000 and is

intended to provide liquidity for disaster recovery or other emergency situations. This line of credit

has been approved by CoBank and in the event of disaster recovery or other emergency situation,

Northwest FCS would not need to notify CoBank prior to usage of the line of credit. At December

31, 2015, 2014 and 2013, no balance was outstanding on this line of credit.

NOTE 8 – Members’ Equity A description of Northwest FCS' capitalization requirements, protection mechanisms, regulatory

capitalization requirements and restrictions, and equities are provided below.

Capital Stock and Participation Certificates

In accordance with the Farm Credit Act and Northwest FCS’ capitalization bylaws, each borrower is

required to invest in Northwest FCS as a condition of borrowing. Borrowers acquire ownership of

capital stock or participation certificates at the time the loan is made but usually do not make a

cash investment. Northwest FCS retains a first lien on common stock or participation certificates

owned by its borrowers.

Pursuant to provisions of the Farm Credit Act, the System’s minimum initial borrower investment

requirement is one thousand dollars or 2 percent of the related loan balance on a per customer

basis, whichever is less. The bylaws of Northwest FCS provide its board of directors with the

authority to modify the capitalization requirements for new loans subject to a maximum of 4

percent of the related loan balance.

Retirement of equities noted above will be at the lower of par or book value, and repayment of a

loan does not automatically result in retirement of the corresponding stock or participation

certificates. The Northwest FCS' Board of Directors (the board) considers the current and future

status of permanent capital requirements before authorizing any retirement of at-risk equities.

Pursuant to FCA regulations, should Northwest FCS fail to satisfy its minimum permanent capital

requirements, retirements of at-risk equities subsequent to such noncompliance would be

prohibited, except for retirements in the event of default or loan restructuring.

Regulatory Capitalization Requirements and Restrictions

The FCA's capital adequacy regulations require Northwest FCS to maintain permanent capital of 7

percent of average risk-adjusted assets and off-balance-sheet commitments. Failure to meet this

requirement can initiate certain mandatory and possibly additional discretionary actions by the FCA

that, if undertaken, could have a direct material effect on Northwest FCS’ financial statements.

Northwest FCS is prohibited from reducing permanent capital by retiring stock or making certain

other distributions to stockholders unless prescribed capital standards are met. The FCA

regulations also require additional minimum standards for capital to be maintained. These

standards require all System institutions to achieve and maintain ratios of total surplus as a

percentage of risk-adjusted assets of 7 percent and of core surplus (generally unallocated retained

earnings) as a percentage of risk-adjusted assets of 3.5 percent. Northwest FCS’ permanent

capital, core surplus and total surplus ratios at December 31, 2015, were 16.1 percent, 16.0

percent and 16.0 percent, respectively. Management is not aware of any reasons why Northwest

FCS’ regulatory capital requirements would not be met in 2016, nor is it currently or expected to

be prohibited from retiring stock or distributing earnings in 2016.

An existing regulation empowers FCA to direct a transfer of funds or equities by one or more

System institutions to another System institution under specified circumstances. This regulation

has not been utilized to date. Northwest FCS has not been called upon to initiate any such

transfers and is not aware of any proposed action under this regulation.


Description of Equities

Northwest FCS is authorized to issue an unlimited number of shares of Class A common stock and

up to 500 million units of Class A participation certificates (PCs) with a par value of five dollars per

share.

Class A common stock is at-risk, has voting rights, and may be retired at the discretion of the

board and, if retired, shall be retired at its book value, not to exceed its par value. At December

31, 2015, there were 2,443,246 shares outstanding with a total par value of $12,216.

Class A PCs are at-risk and do not have voting rights. Class A PCs may be retired at the discretion

of the board and, if retired, shall be retired at its book value, not to exceed its par value. At

December 31, 2015, there were 87,847 units outstanding with a total par value of $439.

Northwest FCS is authorized to issue 100 million shares of Class D Nonvoting stock to CoBank with

a par value of five dollars per share. Class D Nonvoting stock is not transferable and is required to

be issued for cash, with Northwest FCS having no authority to require additional capital

contributions. Retirement and earnings distributions are subject to statutory and regulatory

restrictions. At December 31, 2015, there were no Class D Nonvoting shares outstanding.

Voting common stock is converted to nonvoting common stock two years after the owner of the

stock ceases to be a borrower or immediately if the former borrower becomes ineligible to borrow

from Northwest FCS. Nonvoting common stockholders are eligible to participate in other services

offered by Northwest FCS. Each owner or the joint owners of voting common stock is entitled to a

single vote regardless of the number of shares held, while nonvoting common stock and

participation certificates provide no voting rights to their owners. Voting stock may not be

transferred to another person unless such person is eligible to hold such stock.

Losses that result in impairment of capital stock and PCs would be allocated to such equities on a

prorated basis. Upon liquidation of Northwest FCS, at-risk capital stock and participation

certificates would be utilized as necessary to satisfy any remaining obligations in excess of the

amounts realized on the sale or liquidation of assets. Equities protected under the Farm Credit Act

would continue to be retired at par or face value.

Patronage

Northwest FCS’ bylaws provide for the payment of patronage distributions. All patronage

distributions to eligible stockholders shall be on a proportionate patronage basis as may be

approved by the board, consistent with the requirements of Subchapter T of the IRC. For the years

ending December 31, 2015, 2014 and 2013, the board approved cash patronage distributions of

$91,900, $64,134 and $58,134, respectively. Patronage distributions are recorded on an accrual

basis, based on estimated amounts. The difference between the estimated accrual and the actual

patronage distribution is reflected in retained earnings in the year paid. In December 2015, the

board approved a resolution to distribute a portion of 2016 earnings in the form of patronage

dividends to its stockholders. The patronage dividend will be accrued in 2016 and declared and

paid in 2017.

All earnings not distributed as qualified patronage allocations or appropriated for some other

purpose are retained as unallocated retained earnings. At December 31, 2015, all accumulated

earnings are retained as unallocated retained earnings. In accordance with Internal Revenue

Service requirements, each stockholder is sent a nonqualified written notice of allocation.

Allocated, but not distributed patronage refunds, are included as unallocated retained earnings.

The board considers these unallocated retained earnings to be permanently invested in Northwest

FCS. As such, there is no current plan to revolve or redeem these amounts. No express or implied

right to have such capital retired or revolved at any time is granted.

Accumulated Other Comprehensive Loss

Northwest FCS reports accumulated other comprehensive loss as a component of members’ equity,

which was reported net of taxes as follows:

65 NORTHWEST FCS

The following tables present activity in the accumulated other comprehensive (loss) income, net of

tax by component:

The following table represents reclassifications out of accumulated other comprehensive loss:

NOTE 9 – Income Taxes The provision for income taxes follows:

The provision for income tax differs from the amount of income tax determined by applying the

applicable U.S. statutory federal income tax rate to pretax income as follows:


Deferred tax assets and liabilities were comprised of the following:

The calculation of deferred tax assets and liabilities involves various management estimates and

assumptions as to the future taxable earnings, including the amount of non-patronage income and

patronage income retained. The expected future tax rates are based upon enacted tax laws.

Northwest FCS recorded a valuation allowance in 2015, 2014, and 2013 as reflected in the tables

above. Northwest FCS will continue to evaluate the realizability of the deferred tax assets and

adjust the valuation allowance accordingly.

Northwest FCS has unrecognized tax benefits for which liabilities have been established. A

reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

During 2012, Northwest FCS established a liability of $1,000 for an uncertain tax position related to

an Idaho state tax position. During 2013, it was determined through interactions with the Idaho

state taxing authority that the position was sustainable and as such the uncertain tax liability

accrued in 2012 was reversed. During 2014, Northwest FCS established a liability of $264 for an

uncertain tax position related to a state tax position and in 2015 no adjustments have been made

to this liability.

Northwest FCS recognizes interest and penalties related to unrecognized tax positions as an

adjustment to income tax expense. The total amount of unrecognized tax benefits that, if

recognized, would have no effect on the effective tax rate. Northwest FCS does not have any

positions for which it is reasonably possible that the total amounts of unrecognized tax positions

will significantly increase or decrease within the next 12 months.

Tax years that remain open for federal and state income tax jurisdictions are generally 2012 and

forward.

NOTE 10 – Employee Benefit Plans Certain employees of Northwest FCS participate in a Pension Plan, which was most recently

amended and restated effective January 1, 2014. The Farm Credit Foundations Plan Sponsor

Committee approved amendments to the plan document primarily to address IRC requirements

and to conform provisions of the plan with administrative practices.

The Department of Labor has determined the plan to be a governmental plan; therefore, the plan

is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as

amended (ERISA). As the plan is not subject to ERISA, the plan’s benefits are not insured by the

Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that

participants would receive in the event of the plan’s termination is contingent on the sufficiency of

the plan’s net assets to provide benefits at that time.

Northwest FCS contributes amounts necessary on an actuarial basis to provide the plan with

sufficient assets to meet the benefits to be paid to participants. The amounts ultimately to be

contributed and recognized as expense, as well as the timing of those contributions and expenses,

are subject to many variables including performance of plan assets and interest rate levels. These

variables could result in actual contributions and expenses being greater or less than anticipated.

Benefits are paid from plan assets based on a pre-defined formula that considers salary and

credited service, subject to certain limitations. Several benefit payment options are available, as

defined in the Pension Plan document.

For a limited number of highly-compensated participants in the Pension Plan mentioned above,

Northwest FCS also has a Restoration Plan to restore benefits to those Pension Plan participants

67 NORTHWEST FCS

whose compensation or benefits exceeds the maximum allowed for a qualified pension plan per

Internal Revenue Service regulations or wages excluded from compensation in the Pension Plan

due to deferrals in a nonqualified deferred compensation plan.

The independent actuary calculates the discount rates using a full yield curve method. The

approach maps a high-quality bond yield curve to the duration of the plans’ liabilities, thus

approximating each cash flow of the liability stream to be discounted at an interest rate specifically

applicable to its respective period in time. As of December 31, 2015, Northwest FCS elected to

update the method used to estimate the service and interest components of net periodic benefit

cost for pension and other postretirement benefits consistent with the full yield curve method.

Previously, a single weighted-average discount rate was used to estimate the service and interest

components of net periodic benefit cost. Generally, a lower discount rate correlates to an increase

in the benefit obligation. The change in discount rate did not impact the projected benefit

obligations as of December 31, 2015.

In 2015, the Society of Actuaries issued updated mortality improvement assumptions. The revised

mortality improvement assumptions reflect lower life expectancy improvements based on data

released by the Social Security Administration and other various studies, compared to the study

published in 2014. The adoption of these new tables resulted in a decrease to the projected benefit

obligations of $1.8 million as of December 31, 2015.

The following tables set forth the obligations and funded status of Northwest FCS’ Pension Plan

and Restoration Plan. The funding status and the amounts recognized in the Consolidated Balance

Sheets for post-retirement benefit plans are as follows:

The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets

for each of Northwest FCS’ post-retirement benefit plans are presented in the following tables.

Each of the plans has an accumulated benefit obligation in excess of plan assets in each of the

periods reported:


The components of net periodic pension cost (income) and other amounts recognized in other

comprehensive loss were as follows:

The estimated net loss for the Pension Plan and Restoration Plan that will be amortized from

Accumulated other comprehensive loss into the net periodic benefit cost in 2016 is $1,903 and

$93, respectively. There are no remaining prior service costs in accumulated other comprehensive

loss as of December 31, 2015.

Weighted average assumptions used to determine benefit obligations:

Weighted average assumptions used to determine net periodic benefit cost:

The funding objective of the Pension Plan and Restoration Plans is to provide present and future

retirement or survivor benefits for its members by achieving an attractive rate of return, as defined

by the plans’ policy statements, without exposing the plan to undue risks. A Board of Trustees

(Trustees), called the Farm Credit Foundations Trust Committee (Trust Committee), comprised of

certain members of senior management of the participating employers, supervises the investment

assets of the plans on behalf of the employers. The Trustees adopt an asset allocation strategy for

each plan that reflects return and risk objectives, plan liabilities, and other factors.

The Trust Committee approved an investment policy, which has the overall objective to meet the

benefit obligations for the plan beneficiaries and to earn a long-term rate of return consistent with

the related cash flow profile of the underlying benefit obligations.

The policy uses a risk management strategy designed to reduce investment risks as the funded status

improves. To implement the policy, the plan has adopted a diversified set of portfolio management

strategies to optimize the risk reward profile of the plan. Plan assets are divided into two primary

component portfolios:

• A return-seeking portfolio that is invested in a diversified set of assets designed to deliver

performance in excess of the underlying liability growth rate coupled with diversification

controls regarding the level of risk. Equity exposures are expected to be the primary drivers

of excess returns, but also introduce the greatest level of volatility of returns. Accordingly,

the return-seeking portfolio contains additional asset classes that are intended to diversify

equity risk as well as contribute to excess return.

69 NORTHWEST FCS

The largest subset contains U.S. equities including securities that are both actively and

passively managed to their benchmarks across a full spectrum of capitalization and styles.

Non-U.S. equities contain securities in both passively and actively managed strategies.

Currency futures and forward contracts may be held for the sole purpose of hedging

existing currency risk in the portfolio. Other investments that serve as equity diversifiers

include high yield bonds: fixed income portfolio of securities below investment grade

including up to 30 percent of the portfolio in non-U.S. issuers, global real estate portfolio of

diversified real estate investment trusts and private direct real estate and hedge fund of

funds. These portfolios combine income generation and capital appreciation opportunities

from developed markets globally. Other investment strategies may be employed to gain

certain market exposures, reduce portfolio risk and to further diversify portfolio assets.

• A liability hedging portfolio that is primarily invested in intermediate-term and long-term

investment grade corporate bonds in actively managed strategies that are intended to

hedge interest rate risk. The portfolio will progressively increase in size as the plan’s funded

ratio improves. The use of selected portfolio strategies incorporating derivatives may be

employed to improve the liability hedging characteristics or reduce risk. Finally, there is a

managed liquidity portfolio that is composed of short-term assets intended to pay periodic

plan benefits and expenses.

Portfolios are measured and monitored daily to ensure compliance with the investment policy. Slight

adjustments will be employed based on medium term views and capital market assumptions, but will

remain within stated policy ranges. For 2015, the asset allocation policy of the pension plan provides

a target of 70 percent of assets in return seeking investments and 30 percent of assets in liability

hedging investments. Specifically, return seeking investments include: global equity securities, global

real estate investment trust securities, hedge funds, and high yield bonds; and liability hedging

investments include high quality credit debt securities.

The fair values of the Pension Plan assets measured at fair value on a recurring basis were as

follows:


The tables below represent reconciliations of all Level 3 Pension Plan assets measured at fair value

on a recurring basis:

Plan assets are diversified into various investment types as shown in the preceding table. An

investment consultant is utilized to ensure the diversification of assets. The assets are spread

among numerous fund managers. Diversification is also obtained by selecting fund managers

whose funds are not concentrated in individual stocks and, in the case of international funds,

individual countries.

The expected long-term rate of return assumption is determined by the Farm Credit Foundations

Coordinating Committee (Coordinating Committee) with input from the Trust Committee. Historical

return information is used to establish a best-estimate range for each asset class in which the

plans are invested. The most appropriate rate is selected from the best-estimate range, taking into

consideration the duration of plan benefit liabilities and Coordinating Committee investment

policies.

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active

markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are

observable for the asset or liability through corroboration with observable market data would be

classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and may be

redeemed at NAV per share at the measurement date are classified as Level 2.

Unobservable inputs (e.g. a company’s own assumptions and data) and assets measured at NAV

per share which may not be redeemed at NAV per share at the measurement date would be

classified as Level 3. All assets are evaluated at the fund level.

There were no significant transfers in or out of Levels 1, 2 or 3 during the year.

71 NORTHWEST FCS

The following table presents the expected future payments, which reflect expected future service,

as appropriate, from the Pension Plan and Restoration Plan:

Northwest FCS expects to make a contribution of approximately $3,000 to the Pension Plan in

2016, but it does not expect to make any contributions to the Restoration Plan.

Employees not eligible to participate in the Pension Plan participate in the Defined Contribution

Plan, which is in accordance with Section 401 of the IRC. The Defined Contribution Plan requires

the employer to contribute 3 percent of eligible employee compensation for eligible employees. For

eligible employees hired prior to January 1, 2007, up to an additional 5 percent of compensation in

excess of the employee social security wage base is available. The Defined Contribution Plan

expense recorded by Northwest FCS was $1,839, $1,698 and $1,682, in 2015, 2014 and 2013,

respectively.

All Northwest FCS employees may elect to defer a portion of their salaries in accordance with

Internal Revenue Service rules. For employees participating in the Pension Plan, Northwest FCS

matches employee contributions up to a maximum of 100 percent of the employees’ first 2 percent

of eligible earnings and 50 percent on the next 4 percent of eligible earnings. For employees

participating in the Defined Contribution Plan, Northwest FCS matches employee contributions up

to a maximum of 100 percent on the employees’ first 6 percent of eligible earnings. Employer

matching contributions were $3,664, $3,420 and $3,140 for the years ended December 31, 2015,

2014 and 2013, respectively.

NOTE 11 – Related Party Transactions In the ordinary course of business, Northwest FCS enters into loan transactions with directors,

their immediate families, their affiliated organizations and affiliated organizations of senior officers.

Such loans are made on the same terms, including interest rates, amortization schedules and

collateral requirements, as those prevailing at the time for comparable transactions with unrelated

borrowers. Senior officers and their immediate families are precluded from obtaining new loans

from Northwest FCS.

Loan information to related parties was as follows:

The Repayments and other above reflects changes in related parties for the respective periods.

In the opinion of management, none of these loans outstanding at December 31, 2015 involved

more than a normal risk of collectability.

In the ordinary course of business, Northwest FCS enters into certain other transactions with

directors and their affiliated entities. These transactions for products and services are available to

all customers and are made on the same terms prevailing at the time for comparable transactions

with unrelated customers.

Northwest FCS also recognized $43,446, $40,503 and $38,939 of patronage income from CoBank

for the years ended December 31, 2015, 2014 and 2013, respectively. Patronage distributed from

CoBank was in cash and stock. The amounts accrued for 2015 will be paid by CoBank in 2016. As

of December 31, 2015, Northwest FCS’ investment in CoBank was $339,965, which was included in

assets on the Consolidated Balance Sheets.

In the normal course of business Northwest FCS purchases loan participations from CoBank and

also sells loan participations to CoBank. At December 31, 2015, Northwest FCS had sold

participation interests to CoBank totaling $1,437,468 and had purchased loan participation

interests from CoBank totaling $1,008,790.

As of December 31, 2015, Northwest FCS’ investment in FPI was $2,684, which was included in

other assets on the Consolidated Balance Sheets. The total cost of services purchased from FPI for

the years ended December 31, 2015, 2014 and 2013 was $12,172, $11,977 and $14,373,

respectively, which were included within purchased services on the Consolidated Statements of

Income.


As of December 31, 2015, Northwest FCS’ investment in AgDirect was $23,798, which was

included in other assets on the Consolidated Balance Sheets. Income recorded related to AgDirect

for the years ended December 31, 2015, 2014 and 2013, was $2,637, $2,305 and $753,

respectively, which were included within other noninterest income on the Consolidated Statements

of Income.

As of December 31, 2015, Northwest FCS’ investment in Farm Credit Foundations (Foundations)

was $80, which was included in other assets on the Consolidated Balance Sheets. Foundations

provides human resource information systems, benefit, payroll and workforce management

services. The total cost of services purchased from Foundations for the years ended December 31,

2015, 2014 and 2013, was $594, $557 and $540, respectively, which were included within

purchased services on the Consolidated Statements of Income.

Upon joining ProPartners on September 1, 2012, Northwest FCS became a participant in 25.75

percent of loan volume. Northwest FCS’ participant interest declined to 20 percent on October 1,

2015, and then to 10 percent on December 1, 2015. As of December 31, 2015, Northwest FCS had

ProPartners loans of $100,748 included in loans on the Consolidated Balance Sheets, a reduction of

$171,808 from December 31, 2014. Expenses recorded related to ProPartners for the years ended

December 31, 2015, 2014 and 2013, were $3,584, $3,688 and $2,708, respectively, which were

included within purchased services on the Consolidated Statements of Income.

As of December 31, 2015, Northwest FCS had equity ownerships in the following Unincorporated

Business Entities, which were all formed for the purpose of acquiring and managing unusual or

complex collateral associated with loans. These Unincorporated Business Entities have not had any

activity since creation.

NOTE 12 – Regulatory Enforcement Matters No FCA regulatory enforcement actions currently exist with respect to Northwest FCS.

NOTE 13 – Fair Value Measurements Accounting guidance defines fair value as the exchange price that would be received for an asset

or paid to transfer a liability in an orderly transaction between market participants in the principal

or most advantageous market for the asset or liability. See Note 2 for additional information.

Assets and liabilities measured at fair value on a recurring basis for each of the fair value hierarchy

values are summarized in the following tables:

73 NORTHWEST FCS

The tables below represent a reconciliation of all Level 3 liabilities measured at fair value on a

recurring basis using significant unobservable inputs:

There were no significant transfers between Level 1, Level 2 and Level 3 during the year.

Assets measured at fair value on a non-recurring basis for each of the fair value hierarchy values

are summarized in the following table:

The next table presents the carrying amounts and estimated fair values of Northwest FCS’ financial

instruments:

Valuation Techniques

As more fully discussed in Note 2, accounting guidance establishes a fair value hierarchy, which

requires an entity to maximize the use of observable inputs and minimize the use of unobservable

inputs when measuring fair value. The following represents a brief summary of the valuation

techniques used by Northwest FCS for assets and liabilities.

Assets Held in Non-Qualified Trusts

Assets held in trust funds related to deferred compensation and supplemental retirement plans are

classified within Level 1. The trust funds include investments that are actively traded and have

quoted net asset values that are observable in the marketplace.

Loans

Fair value is estimated by discounting expected future cash flows using Northwest FCS’ current

interest rates at which similar loans would be made or repriced to borrowers with similar credit

risk, and current modeling assumptions. As the discount rates are based on Northwest FCS’ loan

origination rates as well as management estimates of credit risk, management has no basis to

determine whether the estimated fair values presented would be indicative of the assumptions and

adjustments that a purchaser of the loans would seek in an actual sale, which could be more or

less.


For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools

of loans with homogeneous characteristics. Expected future cash flows and interest rates reflecting

appropriate credit risk are separately determined for each individual pool.

For nonaccrual loans, it is assumed that collection will result only from the disposition of the

underlying collateral. Fair value of these loans is estimated to equal the aggregate net realizable

value of the underlying collateral. When the net realizable value of collateral exceeds the legal

obligation for a particular loan, the legal obligation was used for evaluating fair values of the

respective loans. The carrying value of accrued interest receivable was assumed to approximate its

fair value. Loans shown in the table above are valued within the fair value Level 3 hierarchy.

With regards to impaired loans, it is not practicable to provide specific information on inputs as

each collateral property is unique. For certain loans evaluated for impairment under accounting

impairment guidance, the fair value is based upon the underlying collateral since the loans are

collateral-dependent loans for which real estate is the collateral. The fair value measurement

process uses independent appraisals and other market-based information, market conditions,

specific issues relating to the collateral and other matters. As a result, these fair value

measurements fall within Level 3 of the hierarchy. When the value of the real estate, less

estimated costs to sell, is less than the principal balance of the loan, a specific reserve is

established and the net loan is reported at its fair value.

Allowance for Loan Losses

As discussed in Note 2, the allowance for loan losses represents an estimate of the credit risk in

Northwest FCS' loan portfolio. Because the discount rate used to adjust the carrying value of each

loan pool to its fair value reflects the credit risk in the loan portfolio, the allowance for loan losses

is not considered necessary in determining the fair value of Northwest FCS' financial instruments.

The allowance for loan losses shown in the table above is valued within the fair value Level 3

hierarchy.

Other Property Owned

The process for measuring the fair value of other property owned involves the use of appraisals or

other market-based information. Costs to sell represent transaction costs and are not included as a

component of the asset’s fair value. As a result, these fair value measurements fall within Level 3

of the hierarchy.

Investment in System Entities

Northwest FCS has investments in other System entities including, but not limited, to CoBank,

AgDirect, FPI and Foundations, as discussed in Note 11. Estimating the fair value of Northwest FCS

investments in System entities is not practicable because the investments are not traded. The

investment in System entities shown above is valued within the fair value Level 3 hierarchy.

Note Payable to CoBank, ACB

Notes payable are not all regularly traded in the secondary market and those that are traded may

not have readily available quoted market prices. Therefore, the fair value of the majority of

instruments is estimated by calculating the discounted value of the expected future cash flows.

The note payable to CoBank shown in the table above is valued within the fair value Level 3

hierarchy.

Advance Conditional Payments

The carrying value is a reasonable estimate of fair value as these funds are short-term and held in

cash.

Derivative Assets and Liabilit ies

Exchange-traded derivatives valued using quoted prices would be classified within Level 1 of the

valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus,

the derivative positions are valued using internally developed models that use as their basis readily

observable market parameters and are classified within Level 2 of the valuation hierarchy. Such

derivatives include interest rate and foreign currency cash flow hedges.

The models used to determine the fair value of derivative assets and liabilities use an income

statement approach based on observable market inputs, primarily the LIBOR swap curve and

volatility assumptions about future interest rate movements.

Standby Letters of Credit

The fair value of standby letters of credit is based on fees currently charged for similar agreements

or the estimated cost to terminate or otherwise settle similar obligations. The standby letters of

credit shown in the table above are valued within the fair value Level 3 hierarchy.

75 NORTHWEST FCS

NOTE 14 – Commitments and Contingencies Northwest FCS has various commitments outstanding and contingent liabilities.

Northwest FCS may participate in financial instruments with off-balance-sheet risk to satisfy the

financing needs of its customers and to manage their exposure to interest-rate risk. These financial

instruments include commitments to extend credit and/or commercial letters of credit. The

instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized

in the financial statements. Commitments to extend credit are agreements to lend to a customer

as long as there is not a violation of any condition established in the contract. Commercial letters

of credit are agreements to pay a beneficiary under conditions specified in the letter of credit.

Commitments and letters of credit generally have fixed expiration dates or other termination

clauses and may require payment of a fee. At December 31, 2015, there was $3,526,420 of

commitments to extend credit.

Since many of these commitments are expected to expire without being drawn upon, the total

commitments do not necessarily represent future cash requirements. However, these credit-related

financial instruments have off-balance-sheet credit risk because their amounts are not reflected on

the balance sheet until funded. The credit risk associated with issuing commitments is substantially

the same as that involved in extending loans to borrowers and management applies the same

credit policies to these commitments. Upon fully funding a commitment, the credit risk amounts

are equal to the contract amounts, assuming that borrowers fail completely to meet their

obligations and the collateral or other security is of no value. The amount of collateral obtained, if

deemed necessary upon extension of credit, is based on management’s credit evaluation of the

borrower.

Northwest FCS also participates in standby letters of credit to satisfy the financing needs of its

borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified

financial obligations. Standby letters of credit are recorded at fair value on the Consolidated

Balance Sheets. At December 31, 2015, $96,763 of standby letters of credit were outstanding. The

outstanding standby letters of credit have expiration dates ranging from 2016 to 2028.

Northwest FCS maintains a contingency reserve for unfunded lending commitments that reflects

management’s best estimate of losses inherent in lending commitments made to customers but

not yet disbursed upon. The reserve totaled $24,000, $27,000 and $15,000 for the years ended

December 31, 2015, 2014 and 2013, respectively.

During 2013, Northwest FCS completed managed audit proceedings with the taxing authority and

obtained a resolution of amounts potentially owed for periods open within the statute of

limitations. The resolution resulted in Northwest FCS making a net payment of $1,362 to the taxing

authority. The reversal of the remaining previously recorded liability of $1,638 is included as a

reduction to other noninterest expenses in the 2013 Consolidated Statements of Income.

In addition, actions are pending against Northwest FCS in which claims for monetary damages are

asserted. Based on current information, management and legal counsel are of the opinion that the

ultimate liability, if any resulting there from, would not be material in relation to the financial

condition and results of operation of Northwest FCS.

NOTE 15 – Derivative Instruments and Hedging Activities Northwest FCS maintains an overall risk management strategy that incorporates the use of

derivative financial instruments to minimize significant unplanned fluctuations in earnings that are

caused by interest rate volatility. The goal is to manage interest rate sensitivity by modifying the

repricing or maturity characteristics of certain balance sheet assets and liabilities. Northwest FCS

also maintains a foreign exchange risk management strategy to reduce the impact of foreign

currency fluctuations on foreign currency denominated loan assets. As a result of interest rate and

foreign exchange rate fluctuations, fixed rate assets and liabilities will appreciate or depreciate in

market value. The effect of this variability in earnings is expected to be substantially offset by

gains and losses on the derivative instruments that are linked to these assets and liabilities.

Northwest FCS considers the strategic use of derivatives to be a prudent method of managing

interest rate and foreign exchange risk, as it prevents earnings from being exposed to undue risk

posed by changes in interest rates or foreign exchange rates.

By using derivative instruments, Northwest FCS exposes itself to credit risk and market risk.

Generally, when the fair value of a derivative contract is positive, this indicates that the

counterparty owes Northwest FCS, thus creating a performance risk for Northwest FCS. When the

fair value of the derivative contract is negative, Northwest FCS owes the counterparty and,

therefore assumes no performance risk. Northwest FCS’ derivative activities are monitored by

ALCO as part of the Committee’s oversight of the asset/liability and treasury functions. The

Committee is responsible for approving hedging strategies that are developed within parameters

established by the board. The resulting hedging strategies are then incorporated into Northwest

FCS’ overall risk-management strategies.


Northwest FCS has purchased an interest rate cap from CoBank to hedge the potential impact of

rising interest rates on floating-rate debt. If the strike rate of the purchased interest rate cap is

exceeded, Northwest FCS will receive cash flows on the derivative to hedge floating-rate funding

exposure above such strike levels. The interest rate cap is accounted for as a cash-flow hedge.

The interest rate cap has a notional amount of $73,000.

Northwest FCS also uses foreign exchange forward positions to “lock in” a desired cash flow on

foreign currency denominated loans. The specific terms and amounts of the forwards are

determined based on the known cash flows on the loans. Each cash flow is hedged via a separate

foreign exchange forward sale as it arises.

The following table presents the estimated fair values of Northwest FCS’ derivative instruments

and corresponding balances in accumulated other comprehensive (loss) income:

See Note 8 and Note 13 for additional information on derivative instruments.

NOTE 16 – Quarterly Financial Information (Unaudited) Quarterly results of operations were as follows:

Northwest FCS’ 2015 Quarterly Reports to Stockholders are available free of charge by contacting

Northwest Farm Credit Services, ACA, P.O. Box 2515, Spokane Washington 99220-2515 or

contacting by telephone at (509) 340-5300 or toll free (800) 743-2125. Northwest FCS’ 2015

Quarterly Reports to Stockholders are also available free of charge at any office location or at

www.northwestfcs.com. The 2016 Quarterly Reports to Stockholders will be available on

approximately May 10, 2016, August 9, 2016 and November 9, 2016. The Northwest FCS 2016

Annual Report will be available on approximately March 16, 2017.

NOTE 17 – Subsequent Events Northwest FCS has evaluated subsequent events through March 7, 2016, the date the financial

statements were issued or available to be issued, and determined there are no other items to

disclose.

77 NORTHWEST FCS


DISCLOSURE INFORMATION REQUIRED BY FARM CREDIT ADMINISTRATION REGULATIONS (UNAUDITED) Description of Business General information regarding the business is incorporated herein by reference to Note 1 of the

Consolidated Financial Statements included in this annual report.

The description of significant developments, if any, is incorporated herein by reference to

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in

this annual report.

Description of Property Northwest FCS is headquartered in Spokane, Washington. Northwest FCS owns and leases various

facilities across the territory it serves, which are described in this annual report.

Legal Proceedings Information regarding legal proceedings is incorporated herein by reference to Note 14 of the


Description of Capital Structure Information regarding capital structure is incorporated herein by reference to Note 8 of the


Description of Liabilities Information regarding liabilities is incorporated herein by reference to Notes 5, 7, 9, 10, and 14 of

the Consolidated Financial Statements included in this annual report.

Selected Financial Data The Five Year Summary of Selected Financial Data included in this annual report is incorporated

herein by reference.

Management’s Discussion and Analysis Management’s Discussion and Analysis included in this annual report is incorporated herein by

reference.

Board of Directors

Corporate Governance

The Northwest FCS Board of Directors (the board) is comprised of 14 director positions. Each

director elected by the voting membership represents one of the 11 geographic regions that

comprise Northwest FCS’ operating territory. Three directors are appointed by the board. Two of

these board-appointed directors are outside directors who cannot be customers, stockholders,

employees or agents of any Farm Credit institution. One of the two outside directors is designated

as a “financial expert” as defined by FCA Regulation. This director brings independence and

financial, accounting and audit expertise to the board and chairs the board’s Audit Committee. The

other outside director position is used to bring independence, an outside perspective and other

areas of expertise to enhance board oversight capabilities. Currently, both outside directors qualify

as financial experts and one acts as an alternate to the designated “financial expert.” The third

board-appointed director position is a stockholder and is intended to ensure representation of

market segments not currently represented by a stockholder-elected director position or to bring

additional desired skills or background to the board.

The board has a comprehensive director training and development program. This training consists

of an annual board self-assessment of its governance practices as well as a comprehensive new

director orientation program. This program is intended to develop an understanding of the roles

and responsibilities of a director and to familiarize newer board members with key areas of

financial performance, reporting and board oversight. This training commitment involves an

expectation of attendance at both Farm Credit System and non-System meetings, seminars and

conferences as well as a reasonable effort to attend the core sessions of a comprehensive board

training and leadership program during their term of service. This balance of training assures not

only an understanding of the Farm Credit System, but also exposes board members to best

practices of other financial and lending institutions and allows them to benchmark Northwest FCS’

operations against those of other successful lending institutions.

The board is independent of management. The President and Chief Executive Officer (CEO) and

Internal Auditor report to the board and no management or employees may serve as directors.

The board generally has five regularly scheduled meetings each year, plus interim conference calls


as needed between meetings. One of those regularly scheduled meetings is conducted as a

comprehensive three-day strategic planning session. The board operates with a structure of five

committees: Governance, Audit, Compensation, Risk and Strategy. These committees are

structured to provide focus and expertise in key areas of board oversight and to enhance the

overall efficiency of scheduled board meetings. All policies, substantial contracts and other major

initiatives are reviewed by one of these committees, with any actions recommended to the full

board for approval. Each committee approves a charter outlining the purpose of the committee, its

duties, responsibilities and authorities. Generally, these responsibilities are advisory in nature, with

the full board acting on committee recommendations. These charters are reviewed and approved

by the full board at least annually. This committee structure is organized to reflect Northwest FCS’

key enterprise risks and to enhance the overall effectiveness of the board’s oversight of these

areas. These committees generally meet as part of regularly scheduled board meetings and also

conduct conference calls as needed.

With the exception of the Governance and Compensation Committees, committee members, as

well as the Chairs and Vice Chairs, are identified by the board Chair in consultation with the board

Vice Chair and CEO as part of the board’s annual reorganization process. In the case of the

Governance Committee, committee members, as well as the Chair and Vice Chair, are set by policy

as outlined below. In the case of the Compensation Committee, the CEO does not participate in

identifying its members or its Chair and Vice Chair. The Compensation Committee members, Chair

and Vice Chair, are identified by the board Chair in consultation with the Vice Chair and at least

one outside director. Following are full descriptions of the committees:

Governance Committee

This committee is made up of the Chair and Vice Chair of the board as well as the Chair of the

Compensation, Audit, Risk and Strategy Committees. The board Chair and Vice Chair act as the

Chair and Vice Chair of this committee. The Governance Committee has the authority to review,

prioritize and recommend agenda items for board meetings and is responsible for all board policies

not assigned to other committees. Committee duties also include serving as an ad hoc committee

on major System and organizational issues, including System legislative and regulatory affairs and

related matters. This committee also oversees the director nomination and election processes,

director training, standards of conduct and serves as a search committee for appointed director

positions and CEO transition, if needed.

Audit Committee

This committee is made up of at least three board members, including at least one outside

director. All members of the committee should be knowledgeable in at least one of the following:

public and corporate finance, financial reporting and disclosure or accounting procedures. The

director designated as the “financial expert” serves as the chair of this committee. Outside director

Christy Burmeister-Smith currently serves in this position. The board has determined that Ms.

Burmeister-Smith has the qualifications and experience necessary to serve as an audit committee

“financial expert,” as defined by FCA regulation, and she has been designated as such. Outside

director Julie Shiflett also qualifies as a “financial expert” and is the designated alternate to serve

in Ms. Burmeister-Smith’s absence.

The Audit Committee has unrestricted access to representatives of the Internal Audit department,

independent auditors, all employees, outside counsel and any records as desired. The Internal

Auditor reports directly to this committee.

This committee assists the board in fulfilling its oversight responsibility related to accounting

policies, internal controls, financial reporting practices and regulatory requirements. This

committee has a charter detailing its purpose and key objectives, authority, composition, meeting

requirements and responsibilities. The charter, among other things, gives the committee the

authority to hire and compensate the independent auditor, approve all audit and permitted non-

audit services, review the audited financial statements and all public financial disclosures, meet

privately with internal and external independent auditors and review any complaints regarding

accounting irregularities and fraud. The Audit Committee’s charter is posted on Northwest FCS’

website at www.northwestfcs.com.

Compensation Committee

This committee is made up of at least three board members and includes the board Chair and Vice

Chair, at least one outside director, and additional board members selected by the board Chair in

consultation with the board Vice Chair and an outside director. The board Chair also designates the

Chair and Vice Chair of this committee. Neither the CEO nor any member of management can be

involved in the selection of committee members, nor can they participate in any deliberations of

the committee on matters relating to their own compensation.

The committee is responsible for reviewing and recommending for full board approval the

performance goals for the CEO and the evaluation of the CEO’s performance against those goals.

79 NORTHWEST FCS

It also recommends to the board all actions necessary to administer the CEO’s compensation,

benefits and perquisites under the terms of the CEO’s compensation plan. This committee is also

responsible for recommending to the board the terms of the senior officers’ compensation plan and

participation of senior officers in that plan. The board has delegated to the CEO the responsibility

to administer the compensation of those senior officers within board approved guidelines.

However, the CEO must review the compensation levels for each senior officer with the

Compensation Committee before it becomes effective. The committee is also responsible for

director compensation and for oversight of Northwest FCS’ employee compensation and benefit

plans, all board policies applicable to those plans, and other human resource matters not

specifically assigned to other committees.

Risk Committee

This committee provides oversight for the majority of the enterprise risk management practices of

the association, including risk definitions, risk metrics, risk appetite statements and risk monitoring

for asset liability management, compliance, credit default, data governance, financial management,

information security and access, and portfolio strategy. The committee reviews and approves the

quarterly allowance for credit losses. The committee reviews and recommends to the full board for

approval underwriting standards and portfolio and lending limit policies that guide all of Northwest

FCS’ lending and credit related activities. In addition to monitoring the overall credit characteristics

of the industries Northwest FCS serves and the existing portfolio, the committee also reviews and

approves, or recommends to the full board for approval certain credit related actions that exceed

management’s delegated authority. This committee also oversees key risk areas associated with

the Northwest FCS’ financial plan, budget, operations, technology, funding, interest rate, liquidity,

capital management as well as those risks associated with its alliance partners and counterparties.

Strategy Committee

This committee provides oversight in developing and monitoring the association’s strategic and

business plans in accordance with Northwest FCS’ mission, policies and procedures. It is

responsible to ensure board planning sessions and the association’s overall strategic planning

processes serve as foundations for the business plan. This specifically includes evaluating potential

benefits, costs, risks and strategies for considering opportunities such as emerging technologies,

product development, joint ventures, strategic alliances, mergers and acquisitions. The committee

oversees marketing, advertising, community support and local regulatory and legislative activities.

It provides oversight of the Local Advisor program, Crop Insurance and the Business Management

Center. The committee also evaluates management’s assessment of the association’s internal

strengths and weaknesses and external factors such as economic, competitor and political trends.

The committee’s authority is generally limited to investigation, development of proposed positions

and making recommendations to the full board for approval when appropriate.

Northwest FCS Directors

The following represents information regarding the directors of Northwest FCS, including their

principal occupations, business experience and business interests in which they serve on the board

of directors or as a senior officer. All directors are elected or appointed to serve five year terms

and are limited to serving three full terms. Unless otherwise noted, the principal occupation,

business experience and employment of the directors over at least the past five years is related to

their farming, ranching or aquatics operations described below.

R ick Barnes – Callahan, California

Elected in 2010; term expired 2015. Served on Audit and Compensation Committees.

Principal Occupation/Experience: Owner/Operator, Limerock Ranch, a cow-calf operation with

some timber. Also produces grass hay for the horse market.

Other Affiliations: Director, Siskiyou Resource Conservation District, which helps manage local

and natural resource related challenges.

Christy Burmeister-Smith – Newman Lake, Washington

Board-Appointed Outside Director

Appointed in 2010; term expires 2020. Serves as the designated “financial expert” on the

Northwest FCS board. Member of Audit (Chair), Strategy and Governance Committees.

Principal Occupation/Experience: Vice President-Controller and Principal Accounting Officer at

Avista Corporation, a provider of utility services (retired September 30, 2015).

Other Affiliations: Director, Avista Foundation, a community investment organization.

Susan Doverspike – Burns, Oregon

Elected in 2015; term expires 2020. Member of Audit and Strategy Committees.

Principal Occupation/Experience: Owner/Operator (Secretary), Hotchkiss Company, Inc. and

Owner/Operator (Manager) Doverspike Land LLC, cow/calf/yearling operations that produce beef

and grow native meadow grass hay.

Other Affiliations: Treasurer, Oregon Beef Council, a commission promoting Oregon agricultural

products.


J im Farmer – Nyssa, Oregon

Board Vice Chair

Elected in 2010; term expires 2020. Member of Governance (Vice Chair), Compensation and Risk

Committees.

Principal Occupation/Experience: President and co-owner of Fort Boise Produce Co., a family

held corporation that packs and markets fresh onions; Secretary and co-owner of Deseret Farms,

Inc., a family held corporation that produces onions, wheat, field corn and dry edible beans for

seed; co-owner of farmland and other real estate with his brother, Warren Farmer.

Other Affiliations: Secretary/Treasurer and Director, Nyssa Rural Fire Protection District,

providing fire protection to rural property.

Mark Gehring – Salem, Oregon

Elected in 2010; term expired 2015. Served on Strategy (Chair), Risk and Governance Committees.

Principal Occupation/Experience: Owner/operator, Gehring Farms; Managing Member, Gibson

Creek Farms, LLC. Raises marionberries, blackberries, radish seed, wheat and turf grass seed.

Other Affiliations: None.

Skip Gray – Albany, Oregon

Elected in 2015; term expires 2020. Member of Compensation and Risk Committees.

Principal Occupation/Experience: President, Gray Farms, Inc., diversified crop farm;

Member/Manager, Lakeside Ag-Ventures, LLC, vegetable seed, grass seed sales and custom

applications.

Other Affiliations: Member/Manager, Earthsource Investments, LLC, real estate investment;

Treasurer, Specialty Seed Growers of Western Oregon, promoting quality seed production;

Government Affairs Committee, Albany Area Chamber of Commerce, a civic organization.

David Hedlin – Mt. Vernon, Washington

Board Chair

Elected in 2006; term expires 2016. Member of Governance (Chair) and Compensation

Committees.

Principal Occupation/Experience: Owner/Partner/Operator, R C Koudal Land Co. and Hedlin

Farms, vegetable seed, pickling cucumbers, pumpkins and wheat farming.

Other Affiliations: Board Member, Northwest Ag Research Foundation, providing scientific

research in food, agriculture and nutrition; Board Member, Skagitonians to Preserve Farmland,

working for economic viability through research and education; Board Member, Skagit Valley

Culinary Arts, a board advising on curriculum, community outreach and funding issues;

Commissioner, Skagit County Dike District #9, providing fiscal and administrative oversight on the

infrastructure of the district.

John Helle - Dillon, Montana

Elected in 2012; term expires 2017. Member of Risk and Strategy Committees.

Principal Occupation/Experience: Part owner, Helle Livestock, a commercial and purebred

sheep operation; Partner, Rebish and Helle, farming small grains and hay; part owner, Village

Vista, LLC, land management; part owner, Duckworth, Inc., a vertically integrated apparel

company taking wool from sheep to shelf; part owner, HR Wool, LLC, textile production.

Other Affiliations: Director, National Public Lands Council, a group protecting interests of

permittees grazing more than 250 million acres of federally owned grazing lands; Advisory Board

Member, Montana State University Animal and Range Science Department, providing insight and

overview for the department.

Greg Hirai – Wendell, Idaho

Elected in 2014; term expires 2019. Member of Risk (Chair), Governance and Compensation

Committees.

Principal Occupation/Experience: Owner, Hirai Farms, LLC, a 4,500 acre farm producing

wheat, barley, a variety of potatoes, along with corn, alfalfa and triticale as feed for local dairies;

Owner, Hirai Farms Storages, LLC, which owns potato storage facilities.

Other Affiliations: Board Member, North Side Canal Company, providing water resources

management; Board Member and Chair, Lower Snake River Aquifer Recharge District, a group

promoting recharge of the aquifer working through government and users.

Herb Karst – Billings/ Sunburst, Montana

Elected in 2008; term expires 2018. Member of Risk (Vice Chair) and Strategy Committees.

Principal Occupation/Experience: President and Manager, Karag, Inc., a family-held

corporation producing wheat, malting barley and other crops on a 4,300 acre farm.

Other Affiliations: Board Member, The Farm Credit Council, a Farm Credit System trade

association handling legislative and regulatory matters; barley production consultant with Heineken

International.

81 NORTHWEST FCS

Dave Nisbet – Bay Center, Washington

Board-Appointed Stockholder director

Appointed in 2007; term expires 2017. Member of Strategy (Chair), Governance and Audit

Committees.

Principal Occupation/Experience: Owner, Nisbet Oyster Co., Inc.; President and CEO, Goose

Point Oysters, Inc., and Hawaiian Shellfish, LLC, shellfish processing plant, hatchery and grower of

Pacific oysters.

Other Affiliations: Director, Pacific Shellfish Institute, providing research and information for a

healthy coastal ecosystem; Industry Advisory Board Member, Oregon State University Coastal

Oregon Marine Experiment Station, providing fisheries, aquaculture and marine mammal research.

Kevin R iel – Yakima, Washington

Elected in 2007; term expires 2017. Member of Audit and Compensation Committees.

Principal Occupation/Experience: President, Double R Hop Ranches, Inc.; President, Trigen

Enterprises, Inc.; Managing Partner, WLJ Investments LLC, and 4K Investments, LLC, farming

operations raising hops, apples and Concord grapes.

Other Affiliations: Director, Hop Growers of America, U.S. hops farming advocacy; Director,

CoBank, a cooperative bank serving agribusiness, rural infrastructure providers and Farm Credit

associations throughout the U.S.

Nate Riggers – Nezperce, Idaho

Elected in 2014; term expires 2019. Member of Strategy (Vice Chair) and Audit Committees.

Principal Occupation/Experience: Manager and Partner, Riggers Clearwater Farms, J.V., a dry

land farming operation raising wheat, barley, canola, grass seed and alfalfa hay; Manager, Riggers

Land, LLC, land management; President and Secretary, Riggers Brothers, Inc.; President, NCR

Farming, Inc.; President and Secretary, SNS, Inc., farming operations.

Other Affiliations: Board of Trustees member, Leadership Idaho Agriculture, a leadership

development program for farmers and ranchers.

Karen Schott – Broadview , Montana

Elected in 2006; term expires 2016. Member of Audit (Vice Chair) and Strategy Committees.

Principal Occupation/Experience: Owner/Secretary, Bar Four F Ranch, Inc. raising winter

wheat, spring wheat and peas; manages a lease pasture operation.

Other Affiliations: Advisory Board Member, Southern Montana Experiment Station, providing

agricultural education and research.

Julie Shiflett – Spokane, Washington

Board-Appointed Outside Director

Appointed in 2008; term expires 2018. Serves as the alternate to the designated “financial expert”

on the board. Member of Compensation (Chair), Governance and Risk Committees.

Principal Occupation/Experience: Founding partner of Northwest CFO, which assists emerging

and mid-market companies to increase cash flow, profitability, sales, and company value; past

Executive Vice President and Chief Financial Officer, Red Lion Hotels; past Chief Financial Officer

for Signature Genomic Laboratories and Columbia Paint and Coatings.

Other Affiliations: Director and Audit Committee Chair, American Chemet Corporation, a powder

based chemicals manufacturer; Director, Smoky Mountain Metals and Royal Metal Powders,

subsidiaries of American Chemet Corporation; Director, Morrison-Maierle, Engineering firm.

Shawn Walters – Newdale, Idaho

Board Appointed in 2010 to fill remaining term of a vacated director position. Elected in 2011; term

expires 2016. Member of Compensation (Vice Chair) and Risk Committees.

Principal Occupation/Experience: Co-Owner, Walters Produce, Inc., fresh pack potato

operation; Owner, Shawn Walters Farms, Inc.; Partner, Walters & Walters; Partner, Idaho Grain

Producers; Member, Walters Osgood Farms; Partner, Aristocrat Farms, farming operations;

Partner, Walters Family Limited Partnership Osgood; Partner, Walters Family Limited Partnership

Newdale, land ownership; Member, Aristocrat Investments, LLC.

Other Affiliations: Director, Enterprise Canal, delivering natural flow and reservoir storage water

to landowners, and Director, Growmark, a marketing cooperative.

Compensation of Directors

The Compensation Committee oversees director compensation. The committee conducts periodic

director compensation studies to identify current compensation paid to directors of other Farm

Credit associations and similar entities. Based upon these studies, the committee recommends for

approval adjustments to director compensation including any pay differentials to the Chair or other

key board positions. Absent such a study, board policy limits any adjustment to director

compensation to the cost of living index published each year by the FCA. Increases to director

compensation typically become effective May 1 of each year.

Director compensation in May 2015 was set at a rate of $52,000 per year. The Chairs of both the

Audit and Compensation Committees are paid $57,200, representing an additional 10 percent, and

the board Chair is paid $62,400 representing an additional 20 percent, reflecting the unique


responsibilities and significant additional time demands of these three positions. Each director

receives a monthly retainer of $4,333, the Chairs of the Audit and Compensation Committees

receive a monthly retainer of $4,767, and the Chair of the board receives a monthly retainer of

$5,200. No additional per diem is paid for attendance at Northwest FCS’ meetings or functions. If a

director is not able to attend a regular monthly board meeting, then the director only receives the

monthly retainer if attendance at or performance of other official business during that month is

determined to warrant that payment. In addition, Northwest FCS purchases an Accidental Death

and Disability policy for each director.

Directors and senior officers are reimbursed for reasonable travel expenses and related expenses

while conducting association business. In addition, directors are allowed reimbursement for

expenses related to their spouse attending the Annual Stockholder and Local Advisors Meeting,

strategic planning session, the December board meeting and one national meeting each year. In

all other cases, spouse expenses are reimbursed only if attendance at a meeting is preapproved by

the board. The aggregate amount of expenses reimbursed to directors in 2015 was $94,215,

compared to $90,165 in 2014 and $116,238 in 2013. The Director Compensation policy is available

and will be disclosed to stockholders upon request.

Information for each director for the year ended December 31, 2015, is as follows:

Senior Officers Listed below are the CEO and the nine individuals collectively referred to as the Senior Officers of

Northwest FCS who served during 2015. Four of the Senior Officers reported to the CEO and were

on the Management Executive Committee (MEC). At the beginning of 2015, a realignment brought

lending and insurance staff under the leadership of four state presidents who are considered

Senior Officers and also serve on the MEC. Below is information provided on the experience of the

Northwest FCS Senior Officers, as well as any organization for which they serve on the board of

directors or act as a senior officer and the primary business of that organization.

Phil DiPofi, President and CEO

Mr. DiPofi has served as President and CEO since January 1, 2011. Prior to that, he held various

senior officer positions with CoBank. Mr. DiPofi currently serves as Vice Chair on the board of

directors of Financial Partners, Inc. (FPI) which provides technology support for Farm Credit

institutions, including Northwest FCS. He is also the Chair of FPI’s compensation committee and a

member of their audit committee. Mr. DiPofi sits on the Farm Credit System’s Presidents’ Planning

Committee (PPC) which serves in a management coordination capacity for the System and

provides a key advisory role in the System’s decision-making process. The objective of the PPC is

to promote and protect the System’s core values and strengths. He also serves as the Chair of the

Business Practices Committee (BPC), a subcommittee of the PPC. The BPC was formed to develop

specific business practices at the Farm Credit Council and with System entities to come up with

established protocols and communication plans to deal with reputational issues throughout the

Farm Credit System. Mr. DiPofi also served on the board of directors of Second Harvest Food Bank

in Spokane, Washington. Second Harvest leads a network of 250 neighborhood food banks and

meal centers throughout Eastern Washington and Northern Idaho.

Fred DePell, Executive Vice President-Lending and Insurance

Mr. DePell was named Executive Vice President-Lending and Insurance effective January 1, 2015.

He served as Executive Vice President-Financial Services from 1992 through 2014. Prior to 1992,

he held various positions with Northwest FCS since being hired in 1978. Mr. DePell serves on the

board of directors of the YMCA of the Inland Northwest. The YMCA of the Inland Northwest is part

of the largest not-for-profit community service organization in America, working to meet the health

and social service needs of men, women and children.

83 NORTHWEST FCS

Brent Fetsch, Oregon President

Mr. Fetsch was named Oregon President effective January 1, 2015. He served as Senior Vice

President-Chief Strategy Officer and Chief Information Officer from 2011 through 2014. Prior to

2011, he was Senior Vice President-Community Lending and held various positions with Northwest

FCS since being hired in 1987. Mr. Fetsch serves as Treasurer and board member of the Oregon

Food Bank, whose mission is to eliminate hunger and its root causes. Mr. Fetsch also serves on the

board of directors of the United Way of the Mid-Willamette Valley, an organization that seeks to

connect the caring power of people to improve quality of life and build healthy communities. He

also serves as a board member on the Oregon State University – College of Agricultural Sciences

Dean Council and Oregon State University Leadership Academy. The College of Agricultural

Sciences at Oregon State University is Oregon’s principal source of knowledge relating to

agricultural and food systems, environmental quality, natural resources, life sciences, and rural

economies and communities. The Oregon State University Leadership Academy is a program open

to Colleges of Agricultural Sciences and Forestry students to develop leadership skills, improve

future career success and prepare to become the next generation of agriculture, food and fiber

leaders.

Stacy Lavin, Senior Vice President-General Counsel

Mr. Lavin has served as Senior Vice President-General Counsel since May 2011. Prior to that, he

was Assistant General Counsel. Mr. Lavin has worked with Northwest FCS since 2001. Mr. Lavin

reports to the Executive Vice President-Chief Administrative and Financial Officer.

Mandy Minick, Washington President

Ms. Minick was named Washington President effective January 1, 2015. She served as Senior

Vice President-Agribusiness from 2011 through 2014. Prior to 2011, she was Washington Dairy

Team Leader and Sunnyside Branch Manager and held various positions with Northwest FCS since

being hired in 1994.

Tom Nakano, Executive Vice President-Chief Administrative and Financial Officer

Mr. Nakano was named Executive Vice President-Chief Administrative and Financial Officer

effective January 1, 2014. He served as Executive Vice President-Chief Financial Officer between

October 2004 and December 2013. Prior to October 2004, he held various positions with

Northwest FCS since being hired in 1993. Mr. Nakano serves on the Farm Credit Foundations

Consolidated Benefit Trust Committee. This committee oversees the fiduciary and plan

administrative responsibilities of the benefit plans offered by a number of Farm Credit employers,

including Northwest FCS. He also serves as a board member of the Oregon State University Alumni

Association which engages alumni and friends to promote the advancement of the university and

build alumni membership, programs and value-added services.

Mark Nonnenmacher, Executive Vice President-Special Industry Lending and Services

Mr. Nonnenmacher was named Executive Vice President-Special Industry Lending and Services

effective January 1, 2015. He served as Executive Vice President-Agribusiness and Capital Markets

from April 2012 through December 2014. Prior to April 2012, he spent 10 years at CoBank

managing the agribusiness lending operations of their Western Region. He has over 28 years of

experience in the Farm Credit System. Mr. Nonnenmacher serves as a director on the University of

Montana - College of Forestry Advisory Board. This board provides input to the Dean for program

composition, as well as outreach and communication. He also serves on the Idaho Cooperative

Council Board, providing industry awareness, education and political involvement in support of

Idaho cooperatives. In addition, he serves on the ProPartners Board, providing strategic direction

for this System-led vendor financing program for crop inputs.

Bill Perry, Montana President

Mr. Perry was named Montana President effective January 1, 2015. He served as Vice President

Enterprise Risk Management and Credit Underwriting from 2013 through 2014. Prior to 2013, he

was Vice President of Credit and held various positions with Northwest FCS since being hired in

2004. Mr. Perry serves as Treasurer for the board of directors of the Alpha Gamma Rho Fraternity

at Montana State University, which is committed to helping young men develop professional and

social skills to become exceptional leaders in agriculture.

John Phelan, Executive Vice President-Chief Risk Officer

Mr. Phelan has served as Executive Vice President-Chief Risk Officer since January 2011. Prior to

that, he was Senior Vice President-Commercial Lending and held various positions with Northwest

FCS since being hired in 1992. Mr. Phelan serves on the Credit Work Group, a subcommittee of the

Farm Credit System’s PPC. The Credit Work Group provides specific expertise in credit-related

activities including risk ratings and loan portfolio management. He also serves on the board of

directors of the Christian Youth Theatre, a theatre arts training program for Spokane youth ages 6-

18.


Blair Wilson, Idaho President

Mr. Wilson was named Idaho President effective January 1, 2015. He served as Senior Vice

President for the southern half of Northwest FCS’ Financial Services Division from 2011 through

2014. Prior to 2011, he was Regional Vice-President for Southwestern Idaho/Eastern Oregon. He

has held various positions with Northwest FCS since being hired in 1979. Mr. Wilson is currently

the Chair-elect of the board of directors of the Idaho Food Bank, which is a nonprofit organization

working toward a hunger-free Idaho through a network of community-based partners.

Compensation of CEO and Senior Officers

Executive Compensation - Summary

The compensation program for the President and Chief Executive Officer (CEO) and other Senior

Officers of Northwest FCS, as defined by FCA regulations, is designed to reward management for

performance that builds long-term value for stockholders, fulfills Northwest FCS’ mission, ensures

safety and soundness of the organization and enhances the value of the cooperative. This is

accomplished by tying a significant portion of compensation for the leadership team to balanced

scorecards of performance measures that are consistent with the strategy and mission.

To demonstrate commitment to align compensation with strong governance practices that are in

the interests of stockholders, the goal of the Compensation Committee (committee) is to ensure:

• A strong linkage between pay and performance of the organization,

• Multiple-year measurements are used to reward for sustained performance,

• Competitive compensation through market data review,

• Overall compensation program design, including incentive plans, does not encourage

excessive risk taking, and

• Best governance practices are followed.

Compensation Philosophy and Objectives

The compensation program is intended to:

• Support a strong and enduring cooperative enterprise,

• Successfully execute Northwest FCS’ mission,

• Reinforce a high-performance culture through pay for performance,

• Attract and retain talented staff needed to achieve Northwest FCS’ mission, and

• Provide competitive total compensation opportunities that balance current rewards with long-

term opportunities and provide security contingent upon performance.

Linking Pay and Performance

The framework for compensation is designed to pay for performance. To achieve competitive

compensation levels, management must achieve strong results across multiple measures of

performance. As described in the program design below, a large percentage of Senior Officer

compensation is “at risk” if Northwest FCS results are below plan, and as a result compensation

paid would be less than competitive levels. The at-risk component of compensation is provided

through short- and long-term incentives while the “fixed” portion is salary and benefits, as

explained below.

85 NORTHWEST FCS

Program Design

The compensation program for the CEO and Senior Officers has four components:

Component Purpose

Salary Pay a competitive salary to reward for experience, skills and

performance. Provide a competitive basis for other rewards based on

salary.

Short-Term

Incentive Plan

(STIP)

Reward for accomplishing annual Northwest FCS goals that over time

result in long-term success. Reward for profitability, return on equity,

loan quality, expense control and achieving strategic business

objectives. Reward for individual employee contributions.

Long-Term

Incentive Plan

(LTIP)

Reward for sustained performance, safety and soundness of Northwest

FCS. Reward for achieving multi-year Northwest FCS goals for

profitability, return on equity, loan quality, capital adequacy and

achieving strategic business objectives. Retain top performers based on

performance.

Benefits Provide financial security and convenience through a competitive

benefits program and limited perquisites, which are considered

“indirect” compensation.

Total Each component and the total compensation package is managed to be

competitive and ensure a linkage to performance.

Performance Assessment

A framework of multiple performance metrics, goals and individual performance assessment

reinforces Northwest FCS’ pay for performance philosophy. This framework balances annual and

multiple-year performance measures. The STIP is based upon multiple measures of performance,

including an individual performance factor. The LTIP is based on various performance measures

over multiple years of organizational results.

The following table summarizes the scorecards for each plan:

Component Weight Measure/Goal Performance

Period

STIP 30%

20%

20%

10%

20%

After-tax Net Income

Return on Equity

Adverse Assets/Risk Funds

Efficiency Ratio

Strategic Business Objectives

Annual

LTIP 15%

15%

25%

20%

25%

After-tax Net Income

Return on Equity

Adverse Assets/Risk Funds

Core Capital

Strategic Business Objectives

Multiple-Year

At the beginning of each performance period, the committee approves financial targets and goals

for each category, including minimum levels of performance required in order for an award to be

earned in each category, and maximum levels of performance on which incentive will be paid. The

approved financial targets and goals are aligned with the organization’s business plan financial

metrics to ensure Senior Officer incentives match business plan objectives. In addition, a minimum

Return on Assets threshold must be achieved before any incentives are earned. The committee has

discretion to adjust awards or performance assessments as needed to ensure rewards align with

the pay for performance philosophy.

In addition to the measures and goals listed above, adjustments to base salary and STIP awards

are impacted by the individual performance of the participant. Participants that voluntarily

terminate employment or do not maintain satisfactory performance may also forfeit short- and

long-term awards. As a part of Northwest FCS’ performance management process, all employees


are provided performance reviews and in the case of the CEO, the performance review process is

coordinated by the committee with input and approval by the board.

The CEO and all Senior Officers participate in the STIP and LTIP. The target awards for the STIP

range from 20 percent to 60 percent of salary and the actual STIP awards may range from 0

percent to twice the target award, depending on Northwest FCS’ and the individual’s performance.

STIP awards are paid in the year following the performance period based on achievement of

targets and goals and after audited financial statements are issued. Target awards for the LTIP

range from 10 percent to 70 percent of salary, with a range of opportunity from 0 percent up to

twice the target award.

An LTIP was implemented in 2012 with a “stub plan” based on 2012-2013 performance. The 2012-

2013 LTIP stub plan awards were paid in 2014, the 2013-2014 LTIP “stub plan” awards were paid

in 2015 and the 2013-2015 LTIP plan awards will be paid in 2016 as disclosed in the Summary

Compensation Table. Current plans are based on three years of performance and include the

2014-2016 LTIP and 2015-2017 LTIP.

The measures used in incentive compensation are believed to be key drivers of Northwest FCS’

long-term success and are directly correlated to the pay received by Senior Officers. Components

of compensation increased or decreased in 2015 based on the level of achievement of these goals,

which are tied to Northwest FCS’ mission and strategy.

To calculate incentive awards, Northwest FCS aggregates the performance under each plan and

calculates a separate Corporate Performance Factor for the STIP and LTIP. For the STIP, individual

performance is assessed (see Performance Assessment above) and used to determine an

Individual Performance Factor used in the incentive award calculation.

Actual awards under the STIP and LTIP for the CEO and Senior Officers were determined as

follows:

Actual STIP and LTIP awards earned for the CEO and other Senior Officers are presented in the

Summary Compensation Table. Encouraging Appropriate Risk Taking

The compensation program is structured to provide a balance of components that are based upon

multiple financial and non-financial measures of performance. It is designed to encourage the

appropriate level of risk-taking, consistent with maintaining safety and soundness, and

measurements aligned with the business strategy and mission. The committee has taken the

following measures to ensure the compensation program does not encourage inappropriate risk

taking:

• Implemented caps on incentive plans.

• Balanced incentive compensation through a STIP and LTIP.

• Designed incentive plans to provide rewards based upon multiple financial and nonfinancial

measures and goals.

• Incorporated individual performance into the STIP based upon the performance management

system.

• Engaged an independent consultant to conduct a risk review of the compensation and benefit

programs.

• Approved performance targets and ranges for STIP and LTIP metrics that align with the

business plan, strategy and mission.

• Retained discretion to adjust awards as needed.

Compensation Governance Process and Decisions

The committee is composed of members of the board and recommends CEO compensation

decisions to the board. In carrying out its responsibilities, the committee regularly reports to and

consults with the board and, when appropriate, discusses compensation matters with the CEO. The

committee reviews pay and performance matters throughout the year with the assistance of

management and an independent consultant. The committee’s process includes:

• Selecting and approving performance measures for the STIP and LTIP balanced scorecards.

• Reviewing mid-year performance results and accruals of STIP and LTIP awards.

87 NORTHWEST FCS

• Reviewing corporate performance against approved goals and determining final achievement.

• Assessing CEO performance and reviewing Senior Officer performance assessments

conducted by the CEO.

• Determining and approving each component of CEO compensation for the next fiscal year

using market comparisons and performance assessments.

• Approving actual awards under incentive programs for the CEO based upon performance

assessments.

• Approving overall compensation plans and any design changes to compensation programs for

the compensation period.

• Reviewing and approving programs that provide benefits or potential benefits to management

such as employment agreements, severance benefits and other benefit programs.

• An annual assessment of the risk of programs to ensure the operation of the programs does

not create a material adverse risk to the organization.

In conducting its responsibilities as determined by the board, the committee has reviewed and

concluded that:

• Long-term compensation and retirement benefit obligations are appropriate for the

participants in the plans and their roles and responsibilities.

• Incentive programs are not unreasonable or disproportionate to the services provided by the

CEO, Senior Officers and other employees of Northwest FCS.

• Levels and design of the CEO and MEC total compensation align with Northwest FCS’

strategy.

CEO Compensation

The committee reviews and approves the CEO’s total compensation based on the CEO’s

performance, Northwest FCS’ performance, and market considerations prepared by an independent

consultant. Market considerations include compensation for CEOs of comparable financial

institutions, including other Farm Credit System entities. The CEO participates in the STIP and LTIP

programs provided for Senior Officers of Northwest FCS, in addition to receiving salary and

benefits. The CEO’s STIP potential in 2015 was a target of 60 percent to be awarded for meeting

the pre-established goals described above, with the opportunity to earn up to twice the target for

exceeding those goals. The CEO’s LTIP award potential was a target of 60 to 70 percent

depending on the respective plan, to be awarded for meeting pre-established goals, with a

maximum award of twice the target for exceeding the goals.

The “Short-Term Incentive Compensation” shown in the following table reflects the STIP earned by

the CEO in each year. The “Long-Term Incentive Compensation” shown for 2013 represents the

2012-2013 two-year LTIP stub plan award for achievement of performance goals during 2012-

2013; 2014 represents the 2013-2014 two-year LTIP stub plan award for achievement of

performance goals during 2013-2014, and 2015 represents the 2013-2015 LTIP plan award for

achievement of performance goals during 2013-2015. Current plans are based upon three years of

performance and include the 2014-2016 LTIP and 2015-2017 LTIP.

Northwest FCS makes an annual contribution to the CEO’s Non-Qualified Defined Contribution Plan

in an amount equal to the lesser of $200,000 or 15 percent of the total of his base salary and

short-term incentive award. It is reported under “Deferred and Perquisites” in the following table.

The amounts earned related to this award were $180,302, $175,018 and $161,561 for the years

ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, the CEO is employed pursuant to an employment agreement. The

agreement is renewable each year through December 31, 2017 for successive five year terms. The

employment agreement provides specified compensation and related benefits in the event his

employment is terminated, except for termination for cause. In the event of termination except for

cause, the employment agreement provides for (a) payment of his prorated salary and incentives

and (b) payment of three times his base compensation. The employment agreement also provides

certain limited payments upon death, disability or retirement at age 62 or older. To receive

payments and other benefits under the agreement, the CEO must sign a release agreement to give

up any claims, actions or lawsuits against Northwest FCS that relate to his employment with

Northwest FCS. The CEO is also employed pursuant to a Restrictive Covenant Agreement (RCA)

which requires non-solicitation of employees or customers by the CEO for 24 months following

termination of employment.

Senior Officer Compensation

Senior Officers participate in the STIP and LTIP in addition to receiving base salary and benefits

generally provided to management personnel. The committee reviews the total compensation of

the Senior Officers appointed to serve on the MEC based on their individual performance


assessments provided by the CEO, Northwest FCS’ performance, and market considerations

prepared by an independent consultant using the same comparable financial institutions used for

the CEO’s compensation. The STIP and LTIP provide Senior Officers the opportunity to earn

awards as a percent of their base salaries for meeting pre-established performance goals. For

2015, STIP targets ranged from 20 percent to 35 percent, with the potential to earn a maximum of

twice the target for exceeding those goals, and LTIP targets ranged from 10 percent to 40 percent,

with the potential to earn a maximum of twice the target for exceeding those goals.

As of December 31, 2015, the Senior Officers appointed to serve on the MEC are provided

specified severance and other benefits in the event their employment is terminated, except for

termination for cause. In the event of termination, except for cause, a Senior Officer is entitled to

a lump sum severance payment equal to one times base compensation. To receive the severance

payment, the Senior Officer must sign a release agreement to give up any claims, actions or

lawsuits against Northwest FCS that relate to their employment with Northwest FCS. The Senior

Officers are also employed pursuant to a RCA which requires non-solicitation of employees or

customers by the Senior Officers for 24 months following termination of employment.

Summary Compensation Table

The compensation shown in the following table is the actual compensation earned by the CEO and

Senior Officers during the years ended December 31, 2015, 2014 and 2013. The 2015 and 2014

periods also include compensation earned by one highly compensated employee in each year, as

required by FCA regulations. The “Short-Term Incentive Compensation” shown reflects the short-

term incentive earned in each year, which is paid in the following year. The “Long-Term Incentive

Compensation” shown reflects the long-term awards in the year they were earned, together with

any gains or losses incurred, where applicable, on those awards that were held in trust.

(1) Represents the STIP previously described for 2015, 2014 and 2013 which is paid in the first

quarter of the year subsequent to the reported year to persons who continue to be employed by

Northwest FCS or unless otherwise provided for. The 2015 and 2014 years include insurance agent

compensation earned for highly compensated employees.

(2) Represents the LTIP described previously for the 2013-2015 plan (presented within 2015),

2013-2014 stub plan (presented within 2014) and 2012-2013 stub plan (presented within 2013).

There was an additional long-term bonus program in which the CEO and certain Senior Officers

previously participated in. This additional program was terminated in January 2015. During the

year ended 2014, the plan balance that became vested by the CEO was $356,564 which was

presented in the summary compensation table in 2011, the year granted. During the years ended

2014 and 2013, plan balances which became vested related to this plan by senior officers totaled

$198,337 and $178,894 for awards granted in 2011 and 2010, respectively, and were presented in

the summary compensation tables for those respective years. The market value adjustments on

balances while held in trust are included in each respective year.

(3) Various deferred or perquisite amounts including, but not limited to, the CEO Non-Qualified

Defined Contribution Plan discussed previously, other non-qualified contributions made by

Northwest FCS, moving and relocation costs, vacation adjustments and vehicle allowances.

(4) Represents 401(k) employer contributions, other compensation of minimal value and the

change in pension value for two Senior Officers. The 2014 year includes a scheduled retirement

payment for the highly compensated employee shown in that year.

Total compensation paid during the last fiscal year to any Senior Officer, or to any other employee

included in the aggregate, is available and will be disclosed to stockholders upon request. Senior

Officers are reimbursed for travel expenses and related expenses while conducting business for

Northwest FCS and the travel policy is available and will be disclosed to stockholders upon request.

Included in the summary compensation table above for 2015 and 2014 are highly compensated

employees included within an insurance agent compensation plan. This plan covers certain

insurance agents which are not participating in the STIP plan previously described. Payments are

based on both an individual’s performance rating during the year and insurance commissions

earned by Northwest FCS. Payments from this plan are made twice per year.

89 NORTHWEST FCS

The table below provides certain pension information by plan for the Senior Officers participating

in this plan. There were no individuals outside of the Senior Officers noted which required

disclosure and the CEO is not a participant in this plan.

The actuarial present values of accumulated benefits for plans noted within the table are funded

by Northwest FCS.

The Defined Benefit Pension Plan (Pension Plan) provides participants with various options at

normal retirement (age 65). Participants may elect to receive a normal retirement benefit upon

retirement or otherwise terminate their employment and satisfy certain conditions. A normal

retirement benefit is based on, but not limited to, the highest consecutive 60 months’ salary and

the participant’s total years of service in the plan (maximum of 35 years). Participants may elect to

receive their accrued vested pension benefits as an annuity or as a single lump sum distribution. A

lump sum distribution includes the present value of a single life annuity based on mortality and

interest rate assumptions defined in the Pension Plan. The Pension Plan provides benefits up to the

applicable limits under Internal Revenue Code (IRC) Sections 401(a) (17) and 415.

The Defined Benefit Pension Restoration Plan (Restoration Plan) provides eligible employees

benefits which were limited by IRC Sections 401(a) (17), 415 or any Code provision or government

regulations subsequently issued, and therefore are not available under the Pension Plan. The

monthly benefit is equal to the difference between the participant’s actual monthly retirement

benefit payment under the Pension Plan and the monthly retirement benefit payment that would

be payable to the participant under the Pension Plan if the limitations of IRC 401(a) (17), 415 or

any code provision or government regulations subsequently issued, did not apply. The Restoration

Plan valuation was determined using an assumption that benefits will be distributed as a lump sum

at the participants’ earliest unreduced retirement age.

Transactions with Senior Officers and Directors Information regarding related party transactions is incorporated herein by reference from Note 11

to the Consolidated Financial Statements included in this annual report.

Involvement in Certain Legal Proceedings There were no events during the past five years that are material to evaluating the ability or

integrity of any person who served as a director or Senior Officer on January 1, 2016, or at any

time during 2015.

Relationship with Independent Public Auditors There were no changes in independent public auditors since the prior annual report to

stockholders. In addition to audit services, the independent public auditors,

PricewaterhouseCoopers LLP, performed non-audit services for a fee of approximately $9,000 in

2013, which were approved by the audit committee. There were no similar fees incurred during

2014 or 2015. There were no material disagreements with the independent public accountants on

any matter of accounting principles or financial statement disclosures during this period.

Audit Fees and Expenses Fees and expenses incurred by Northwest FCS for audit services rendered by its independent

public auditors, PricewaterhouseCoopers LLP, were approximately $414,000, $442,000 and

$401,500 at December 31, 2015, 2014 and 2013, respectively. These fees and expenses were

incurred for the annual financial statement audit for all years and included the audit of internal

controls over financial reporting for 2013.

Consolidated Financial Statements The Consolidated Financial Statements, together with the Report of Independent Auditors dated

March 7, 2016, and the Report of Management appearing in this annual report, are incorporated

herein by reference.

Relationship with CoBank, ACB Northwest FCS’ statutory obligation to borrow from CoBank, ACB is discussed in Note 7 of the

Consolidated Financial Statements.

• CoBank, ACB’s ability to access the capital of Northwest FCS is discussed in Note 4 of the

Consolidated Financial Statements.


• The major terms of any capital preservation, loss sharing or financial assistance agreements

between Northwest FCS and CoBank, ACB are discussed in Notes 2 and 8 of the Consolidated

Financial Statements.

• A discussion of how the financial condition and results of operations of CoBank, ACB may

materially affect a stockholder investment in Northwest FCS and Northwest FCS’ investment in

CoBank, ACB is discussed in Note 1 and Note 4 of the Consolidated Financial Statements.

• CoBank, ACB is required to distribute its annual report to shareholders of Northwest FCS if a

“significant event,” as defined by FCA regulation occurs.

Privacy Protection Afforded Under FCA Regulations Customer financial privacy and the security of other non-public information are important.

Therefore, Northwest FCS holds customer financial and other non-public information in strict

confidence. Federal regulations allow disclosure of such information by Northwest FCS only in

certain situations.

91 NORTHWEST FCS


DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING AND SMALL FARMERS PROGRAM Program Definitions Northwest FCS has a specific program in place to serve the credit and related needs of young,

beginning and small farmers and ranchers (YBS) in its territory. The definitions of young,

beginning and small farmers and ranchers, as developed by the Farm Credit Administration are: • Young – A farmer, rancher, producer or harvester of aquatic products who is age 35 or

younger, as of the loan transaction date.

• Beginning – Any farmer, rancher, producer or harvester of aquatic products who has 10

years or less farming or ranching experience, as of the loan transaction date.

• Small – Any farmer, rancher, producer, or harvester of aquatic products who generates less

than $250,000 in annual gross sales of agricultural or aquatic products as of the loan

transaction date.

Mission and Objectives

Mission Statement

To advance young, beginning, and small farmers' success through deliberate strategies in lending

and professional development.

Objectives of the Program • To promote agriculture by encouraging and developing competent YBS customers to enter

into or remain in agriculture by supporting their efforts to do so.

• To recognize the challenges facing YBS customers attempting to obtain credit and establish a

viable enterprise and to establish Northwest FCS as a leader in providing the products and

services necessary for them to succeed.

• To develop business relationships with next generation producers who:

o Exhibit the management skills necessary to build a solid financial position,

o Contribute to the agricultural community, and

o Will become profitable customers for the association.

• To provide adequate board oversight to ensure the needs of this market are met on a

constructive, safe, and sound basis.

Services Provided Several credit and related services are offered through the board approved YBS Program directly

and in coordination with other organizations that allow Northwest FCS to effectively serve the

needs within these producer segments. Highlights of the YBS Program include: • The AgVision program enhances Northwest FCS’ ability to serve the young, beginning and

small producers who are actively involved in farming and those who may not meet traditional

credit standards. AgVision customers account for $479.7 million of loan volume. Through this

program, special consideration is given in loan underwriting ratios, interest rate reductions,

and origination and appraisal fee waivers. More than $1.5 million in fee waivers have been

provided to AgVision customers since 2001, with over $110,000 in fees waived in 2015.

• More than $630,000 has been reimbursed to customers for educational expenses, technology

purchases, recordkeeping and tax planning and preparation services since the 2001 inception

of the AgVision program. Reimbursements totaled $67,767 in 2015.

• An advisory group which includes young, beginning and small farmers and ranchers who

provide Northwest FCS with customer feedback, function as a liaison to association

management and advance the YBS program impact within the agricultural community.

• The RateWise program rewards YBS producers for continuing their management education

with interest rate reductions on new loans.

• Northwest FCS’ interest only, JumpStart loan program is designed to help entrepreneurs

begin promising new ventures in agriculture.

• Customer education programs are tailored to YBS producers focusing on areas such as farm

economics, financial literacy, profitability, cash flow, personal finance and succession

planning, with several of these workshops conducted in Spanish each year.


• The Northwest FCS’ Business Management Center helps customers assess, understand and

improve management practices through group and individual interactions via orientations,

workshops and consulting. Numerous YBS customers have taken part in these various

programs.

• Northwest FCS offers crop insurance and life insurance to help YBS producers mitigate risk.

• A portion of the YBS producers’ loan portfolio is supported by government guarantees,

including guarantees by the Farm Service Agency (FSA) and the U.S. Department of

Agriculture’s (USDA) Business and Industry Guaranteed Loan Program.

Government Guaranteed Loans to YBS Farmers and Ranchers

(dollars in thousands)

Regional Demographics The service area of Northwest FCS primarily includes the states of Washington, Montana, Oregon,

Idaho and Alaska. The following table compares demographic information from the USDA’s 2012

Census of Agriculture to the 2007 census for YBS producers in Northwest FCS’ area. This census is

conducted every five years.

Census of Agriculture - Young, Beginning and Small Producers

2012 vs. 2007

The 2012 Census of Agriculture results show a 0.9 percent increase in young producers and an 8.0

percent decrease in small producers from 2007 to 2012. The beginning producer data cannot be

compared between the 2012 and 2007 census due to a change in the census process. The 2007

census data for beginning producer counted “years on present farm” and in 2012 counted “years

operating any farm.”

YBS Volume in the Northwest FCS Portfolio The following table reflects the percentage of YBS producers’ loans in the Northwest FCS loan

portfolio as of December 31, 2015. Methods by which the Census demographics and the Northwest

FCS’ data are presented differ as the Census data is based on number of producers, while the

Northwest FCS’ data is based on number of loans. Additionally, the FCA definition of a young

farmer is an individual who is 35 years or younger, while the USDA uses an individual 34 years old

or less; and FCA beginning farmers have 10 years or less farming or ranching experience while the

Census of Agriculture considers nine years or less farming or ranching experience. The USDA small

producers’ definition aligns closely with the FCA definition and overall the USDA study is the most

useful tool to accurately measure association YBS goals and results.

Young, Beginning and Small Farmers and Ranchers – Number and Volume of Loans

Outstanding (including available commitment) (dollars in thousands)

The table above includes loan participation interests from states outside Northwest FCS’ chartered

territory.

93 NORTHWEST FCS

Goals and Results Quantitative goals have been established each year by board policy for YBS producers’ loan volume

and numbers based on demographic data. The 2015 goals were as follows:

2015 Young, Beginning and Small Service Goals & Results (dollars in thousands)



OFFICE LOCATIONS Northwest FCS Headquarters 1700 S Assembly Street Spokane, Washington 99224 (509) 340-5300 Future Headquarters 2001 S Flint Road Spokane, Washington 99224* * Northwest FCS Owned

Idaho Montana Oregon Washington

73 Fort Hall Avenue, Suite A American Falls, Idaho 83211 (208) 226-1340

370 N Meridian Street, Suite A Blackfoot, Idaho 83221 (208) 782-3800

1408 Pomerelle Avenue, Suite B Burley, Idaho 83318 (208) 678-6650

501 King Street Cottonwood, Idaho 83522 (208) 962-2280

1215 Pier View Drive Idaho Falls, Idaho 83402* (208) 552-2300

2631 Nez Perce Drive, Suite 201 Lewiston, Idaho 83501 (208) 799-4800

16034 Equine Drive Nampa, Idaho 83687 (208) 468-1600

102 N State Street, Suite 2 Preston, Idaho 83263 (208) 852-2145

1036 Erikson Drive Rexburg, Idaho 83440 (208) 656-2100

815 N College Road Twin Falls, Idaho 83301 (208) 732-1000

139 River Vista Place, Suite 201 Twin Falls, Idaho 83301 (208) 732-1000

3490 Gabel Road, Suite 300 Billings, Montana 59102 (406) 651-1670

1001 W Oak Street, Suite 200 Bozeman, Montana 59715 (406) 556-7300

519 S Main Street Conrad, Montana 59425 (406) 278-4600

38 A South Central Avenue Cut Bank, Montana 59427 (406) 873-9070

134 E Reeder Street Dillon, Montana 59725 (406) 683-1200

54147 US Highway 2, Suite A Glasgow, Montana 59230 (406) 228-3900

700 River Drive S Great Falls, Montana 59405 (406) 268-2200

1705 US Highway 2 NW, Suite A Havre, Montana 59501 (406) 265-7878

120 Wunderlin Street, Suite 6 Lewistown, Montana 59457 (406) 538-7737

502 S Haynes Avenue Miles City, Montana 59301 (406) 233-3100

3021 Palmer Street, Suite B Missoula, Montana 59808 (406) 532-4900

123 N Central Avenue Sidney, Montana 59270 (406) 433-3920

3370 10th Street, Suite B Baker City, Oregon 97814 (541) 524-2920

2345 NW Amberbrook Drive, Suite 100 Beaverton, Oregon 97006 (503) 844-7920

650 E Pine Street, Suite 106A Central Point, Oregon 97502 (541) 665-6100

2911 Tennyson Avenue, Suite 301 Eugene, Oregon 97408 (541) 685-6140

300 Klamath Avenue, Suite 200 Klamath Falls, Oregon 97601 (541) 850-7500

308 SE 10th Street Ontario, Oregon 97914 (541) 823-2660

12 SW Nye Avenue Pendleton, Oregon 97801 (541) 278-3300

3113 S Highway 97, Suite 100 Redmond, Oregon 97756 (541) 504-3500

2222 NW Kline Street Roseburg, Oregon 97471 (541) 464-6700

650 Hawthorne Avenue SE, Suite 210 Salem, Oregon 97301 (503) 373-3000

3591 Klindt Drive, Suite 110 The Dalles, Oregon 97058 (541) 298-3400

265 E George Hopper Road Burlington, Washington 98233 (360) 707-2353

629 S Market Boulevard Chehalis, Washington 98532 (360) 767-1100

224 N Main Street Colfax, Washington 99111 (509) 397-2840

1501 E Yonezawa Boulevard Moses Lake, Washington 98837 (509) 764-2700

9530 Bedford Street Pasco, Washington 99301 (509) 542-3720

6119 Burden Boulevard, Suite B Pasco, Washington 99301 (509) 542-3720

201 W Broadway Avenue, Suite B Ritzville, Washington 99169 (509) 659-1105

2157 N Northlake Way, Suite 120 Seattle, Washington 98103 (206) 691-2000

1515 S Technology Boulevard, Suite B Spokane, Washington 99224 (509) 340-5600

2735 Allen Road Sunnyside, Washington 98944 (509) 836-3080

1 W Pine Street Walla Walla, Washington 99362 (509) 525-2400

667 Grant Road, Suite 1 East Wenatchee, Washington 98802 (509) 665-2160

1360 N 16th Avenue Yakima, Washington 98902 (509) 225-3200

95 NORTHWEST FCS

northwest fcs 2015 annual report

Documents